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Forward Thinking Magazine : April 2011
24 Macquarie Adviser Services Summary Providing advice in the mortgage lending area can lead to some interesting and technically challenging issues. Deductibility can be subjective – the intentions of the borrower can have a significant impact, which may be discerned from objective evidence including how the loan is marketed. Although Hart was ultimately an untoward result for the taxpayers concerned, and led to a high level of caution in the mortgage industry in general, understanding the details of the case may be a significant step towards advisers feeling more comfortable about providing advice to clients on deductible and non-deductible debt arrangements. Marketing The marketing of the Wealth Optimiser scheme relied heavily on promoting the tax advantages of the arrangement over a standard P&I arrangement. This appears to have significantly helped the Commissioner’s argument that the dominant purpose of entering into the arrangement was for a tax benefit, and that the tax benefit was the additional interest (including compounded interest) which exceeded the interest which would have been incurred if a P&I repayment arrangement had been entered into. debt security The increasing balance of Account 2, potentially to a level in excess of the value of the rental property, would result in the main residence being held as security well after the debt relating to that property is cleared. The Court appears to have placed some weight on the ‘absence of adversion’ by the Harts to this additional security requirement – inferring an indication of the dominant purpose of obtaining a tax benefit. Other repayment options The Court found there was no evidence to support the notion that a suitable interest only arrangement for a twenty-five year term was available for the Hart’s rental property. It is arguable that if evidence of interest only loan availability had been available to the Court, the tax benefit denied by Part IVA may have been reduced. Interest only loans are common-place in today’s mortgage product market, and increasingly loan facilities which allow interest to be compounded are available also. debt repayment strategies Financial advisers should note that the High Court went to considerable lengths to explain that Part IVA would not ordinarily be applied in circumstances where a taxpayer structures his or her affairs in a way that results in a rental property being more highly geared than a principal residence. In particular, Gleeson CJ and McHugh J pointed to a situation where an investment property is geared via an interest only lengthy term loan: If...a taxpayer took out two separate loans, and the terms of the loan for the investment property were different from the terms of the loan for the residential property in that they provided for a higher ratio of debt to equity, and for payments of interest only, rather than interest and principal, during a lengthy term, then ordinarily that would give rise to no adverse conclusion under s 177D [of Part IVA]. Comments and key outcomes of Hart’s case