Technical Update: Split Loans and Part IVA

A split loan  is a loan facility usually secured against a principal place of residence with two separate loan  accounts. One loan is for ‘private’ purposes – usually paying off the home and the second loan is for ‘investment’ purposes, for example the purchase of managed funds or a share portfolio.  Instead of paying interest on the investment loan, the interest is capitalized and the interest payment is redirected to the ‘private’ loan.  The result being the ‘private’ loan which is non tax deductible is paid off quicker while the investment loan has grown because of the capitalization of the interest giving rise to a greater tax deduction.

Tax ruling TR98/22 looks at the consequences of entering into such loans and whether the application of Part IVA may apply.  In a nutshell, the anti –avoidance provisions of Part IVA apply to disallow the additional interest incurred on the investment account. This is the interest that applies as a result of the capitalizing interest on the investment account.  Click here to download the tax ruling.

The ATO sums up its position as follows:

“We accept each case must be considered on its merits and, in the absence of other considerations, the choice of repaying non-deductible debt before deductible debt is a normal commercial decision. However, we have examined the way these particular facilities are structured and have concluded they are not ordinary arrangements and they bear the stamp of tax avoidance.”