You may of heard of "Part IVA", but whats it's purpose? When is it applied? And how can it spoil what seemed like a great idea?
Part IVA operates as a general anti avoidance provision to protect the integrity of Australia's tax system. To apply there must be a 'scheme' and a 'tax benefit' obtained in connection with the scheme. It must also be reasonable to conclude that the person entered into the scheme for the 'sole or dominant purpose' of enabling a taxpayer to obtain a 'tax benefit'.
There are certain loan arrangement schemes that are specifically marketed to enable people to 'own their own home sooner' or 'pay their home loan off sooner'. It is important to understand how the ATO views such arrangements as detailed in TD 2012/1.
One scheme entails the taxpayer meeting interest repayments on an investment loan from a line of credit. Under these schemes, the line of credit is used to meet repayments on the investment loan. The interest on the line of credit is generally higher than the investment loan and therefore increases the tax deduction for the interest expense.
For these types of arrangements, it would be reasonable to expect that if the scheme had not been entered into, the taxpayer would meet the interest payments on the investment loan out of their own cashflow and not incur additional interest or incur a smaller amount of interest on the line of credit. As a result, the taxpayer would not have been entitled to any deductions in relation to such interest or would be entitled to a smaller deduction.
In summary, upon examination of the facts in each situation, if a reasonable person could conclude that the arrangement was entered into for the dominant purpose of obtaining a tax benefit, Part IVA applies to the scheme and the ATO would be entitled to cancel any deductions attributable to the line of credit. Very painful when you consider they can go back retrospectively and also impose a fine!
Assistant Treasurer Mark Arbib has announced the Government would act to protect the integrity of Australia's tax system by introducing amendments to Part IVA of the income tax law that will ensure that the general anti-avoidance rule continues to be effective in countering tax avoidance schemes that are carried out as part of broader commercial transactions.
The message is clear, be careful with schemes of this nature and if in doubt ask your advisor to obtain a tax determination from the ATO specific to you.
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