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Investors contemplating an arrangement which is being marketed as a ‘mortgage management’ plan should be wary. Under this scheme, split loan arrangements - that is, the combination of an investment loan, a home loan and a credit facility – are being promoted as providing tax-effective financing and therefore have attracted the attention of the Tax Office. The schemes generally involve a person taking out one loan for their ‘principal place of residence’ and an additional loan for an investment property. The investor then establishes a line of credit facility. The Tax Office says taxpayers often partake in split loan arrangements to pay off their home mortgage sooner. In response to a surge in such schemes, the Tax Office has issued a recent tax determination to alert taxpayers to the fact that the general anti-avoidance provisions may be applied to deny interest deductions. In these schemes, the home loan, investment loan and the line of credit are each secured against the individual’s residence and/or the investment property. The line of credit is drawn down to fund the interest payments on the investment loan as they fall due. Typically, the taxpayer’s cash inflows are deposited to pay into their home loan, which reduces the non-deductible interest otherwise payable on the home loan. All three loan products are typically provided by a single lender. The interest rates on the home loan and the investment loan are also generally the same whereas the interest rate on the line of credit is marginally higher. If the line of credit reaches its approved limit before the home loan has been repaid, the individual may apply to increase the limit on the line of credit in conjunction with a corresponding decrease in the available ‘redraw’ amount in the home loan. In the Tax Office’s view, an individual’s purpose of paying their home loan off sooner or owning their home sooner is not in itself an adequate defence against the application of the general anti-avoidance provisions. How to Protect Yourself Anyone involved in a split loan scheme who voluntarily tells the Tax Office about their involvement may be eligible for a reduction in any penalties they may face. Before committing to an investment arrangement, ensure you understand the ins and outs of the arrangement and are certain that the promised tax benefits are legally available. Consider these steps to protect yourself: • Conduct research on the creator of the investment arrangement • Obtain a product disclosure statement (PDS) from the arrangement creator/promoter • Obtain a product ruling Most importantly, if you are unsure about a situation that you are considering entering into, contact a tax professional who can give you more complete advice, including ways to avoid tax penalties, spotting schemes that may get you in trouble and what to do if you have fallen victim to one of these schemes. For more information about Health Medical Insurance and Professional Indemnity Insurance please visit our website http://www.taxforhealthprofessionals.com.au/
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