Private ruling: Investment property
Date of advice: 1 March 2018
Published: June 2018
Ruling period: Year ended 30 June 2018 | Year ended 30 June 2019 | Year ended 30 June 2020 | Year ended 30 June 2021 | Year ended 30 June 2022
Date scheme commenced: 1 July 2017

Ruling: Q1: To the extent the interest expenses you claim in relation to the arrangement described are allowable deductions pursuant to section 8-1 of the Income Tax Assessment Act 1997 , will Part IVA of the Income Tax Assessment Act 1936 apply to deny any part of the deduction? | A1: No

Relevant facts and circumstances: You will to buy a property (the property) to use for investment purpo ses. You will pay $X for the property which is market value established by valuations. The property is currently owned by your spouse and the title is in their name alone. At settlement, the title will change to your name. It is currently the family home. The sale is a private sale. You have engaged an independent third party to value the property and a conveyancer to draw up the contract of sale. You will pay relevant transfer fees (stamp duty) and conveyancing fees of around $X at the time of sale. The property will be added to your investment portfolio. You will repay the borrowings using the rental income from your rental properties and your salary. You currently have other properties in your investment portfolio. You have a mortgage on these properties with the bank, currently with an amount outstanding. You pay standard commercial interest rates. These properties and the mortgage are in your name. You will not live in the property and will rent it out very soon after taking ownership. You will engage a real estate agent to manage the property on your behalf. This agent has drafted a contract for lease and advised the expected rental income for the property will be $Z per week.

Relevant legislative provisions: Income Tax Assessment Act 1936 Part IVA

Reasons for decision: Summary: Part IVA of the ITAA 1936 will not apply to the proposed arrangement. | Detailed Reasoning - Application of Part IVA of the ITAA 1936: Part IVA of the ITAA 1936 (Part IVA) gives the Commissioner the discretion to cancel a tax benefit that has been obtained, or would be obtained, but for the application of the Part, by a taxpayer in connection with a scheme to which Part IVA applies. In order for the Commissioner to exercise the discretion, the requirements of Part IVA must be satisfied. That is: (i) a ‘tax benefit’ was or would, but for the application of Part IVA, have been obtained; (ii) the tax benefit was or would have been obtained in connection with a ‘scheme’; and (iii) having regard to eight factors specified in the law, it would be concluded that the main or dominant purpose of entering into the scheme was to obtain the tax benefit. The eight factors are: (i) the manner in which the scheme was entered into or carried out, (ii) the form and substance of the scheme, (iii) the time at which the scheme was entered into and the length of the period during which the scheme was carried out, (iv) the result in relation to the operation of this Act, but for this Part, would be achieved by the scheme; (v) any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme, (vi) any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme, (vii) any other consequences for the relevant taxpayer, or for any person referred to in subparagraph (vi), of the scheme having been entered into or carried out; and (viii) the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any other person referred to in subparagraph (vi). The application of Part IVA depends on the facts and individual circumstances of each particular case. It requires the Commissioner to identify and compare the scheme and what would have happened, or might reasonably be expected to have happened absent the scheme (a counterfactual, or alternate postulate). Given a consideration of the broader details of this arrangement, Part IVA of the ITAA 1936 will not apply to deny the deduction for the interest expenses otherwise deductible under section 8-1 of the ITAA 1997 in the proposed arrangement the subject of this Ruling Application.