High Court Ruling Allows ATO To Commence Split Loan Crackdown

by Mary Swire, Tax-News.com, Hong Kong

31 May 2004

Australian Tax Commissioner Michael Carmody has welcomed a decision by the High Court outlawing the use of so called ‘split loan’ facilities in house purchases, a ruling that is likely to usher in a new tax crackdown on the property investment sector.

A typical split or linked loan is a credit facility taken out with a financial institution under which there is a borrowing split into sub-accounts. One account is usually for investment purposes and the other private. The purported effect of these arrangements is that the taxpayer can claim a greater tax deduction for interest on the investment component of the loan than would be the case with the conventional loans.

The ATO become aware that split loans were being marketed in the late 1990s, prompting the Office to draft a new tax ruling. However, the new piece of case law now gives the authorities licence to expand their audit program in the property finance sector.

"The unanimous decision of the Court confirms the effectiveness of the general anti-avoidance provisions in protecting the integrity of our tax system," commented Mr Carmody.

Hinting at the new crackdown to come, he added: "Importantly the Court, in its reasons for its decision has given substantial guidance to the Tax Office and the community about the operation of the general anti-avoidance provisions."

In an interview with the Sydney Morning Herald, Raelene Vivian, the deputy commissioner for personal tax, confirmed that the ATO intends to double both capital gains and rental audits to find examples of understated tax declarations.

"I would say that on the audits we have conducted - because they do get quite targeted - we've had about an 85 per cent adjustment rate," she told the SMH.

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