Ato 'no' To Tax Break On Interest
Sydney Morning Herald
Friday March 10, 1995
The Tax Office will not allow tax deductions for interest payments made by partners who upgraded their home by refinancing their first home and then renting it out.
The opportunity to claim the deduction was provided by a 1992 tax case, Roberts and Smith, which implied that persons who jointly own a rental property could in some cases claim a tax deduction for interest on money borrowed to acquire a family home. The tax office has yet to issue its detailed reasons to support the ruling.
The deduction opportunity arose where a couple, for example, had built up equity in their home but wanted to move to a bigger, more expensive home and mortgage the existing home to achieve this, purchasing the new home with the funds raised.
They would then retain the original home as a rental property and claim the refinancing interest costs against the rental income from the first property, even though the funds were used to buy their new family home rather than the rental property.
Tax advisers argued that by moving out of the family home and renting the house, the couple created an income-producing asset and a partnership for income tax purposes and were in receipt of income jointly.
If they refinanced the first home, then interest would be deductible to the extent that the borrowings represented a payment in reduction of partnership capital. It did not matter that the funds paid to the partners were later put to personal use.
Coopers & Lybrand tax partner Mr Paul Brassil yesterday said the commissioner had now stated that the Tax Office did not accept that partnership capital existed where people merely owned property.
He said that effectively this meant the ATO did not consider that the Roberts and Smith decision could apply to what were basically home loan financing arrangements.
However, the matter is unlikely to rest there, and he expects the decision to be tested further in the courts.
Mr Brassil has advised that taxpayers who have made deduction claims contrary to the commissioner's approach now seek the advice of their tax adviser to discuss the ramifications on their personal tax planning and cash-flow position.
However, he maintains that the tax planning opportunity to claim interest will continue to be available in other scenarios.
© 1995 Sydney Morning Herald
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