Private ruling: Investment loan interest payment arrangement - Part IVA
Published: March 2012
Ruling period: Year ended 30 June 2012 | Year ended 30 June 2013 | Year ended 30 June 2014
Date scheme commenced: 1 July 2011

Ruling: Q1: Have you obtained a tax benefit in connection with a scheme to which Part IVA of the Income Tax Assessment Act 1936 (Part IVA) applies in each of the Relevant Income Years? | A1: Yes. The Commissioner is entitled to make determinations under section 177F of the ITAA 1936 in each of the Relevant Income Years (defined below) as set out in the Reasons for Decision.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. Husband (the husband) and Wife (the wife) (together the Taxpayers) are married. Property A · The Taxpayers acquired a property (Property A) (as joint tenants) for use as their residence. The Taxpayers jointly borrowed from a bank to fund the purchase (Bank Loan 1). · The husband subsequently sold 49% of his interest in Property A to the wife (i.e. the husband now owned 1% and the wife 99%). The sale occurred 'as a means of asset protection'. In addition, the sale allowed 'the release of equity in the property so as to reduce the mortgage of the new residence (Home)' (see below). The sale price was determined by taking 49% of an independent valuation. The sale was 'an off market transfer between spouses and a contract was not prepared'. No stamp duty was paid on the sale. A title search confirms that Property A is owned by the husband and the wife as tenants in common (1% the husband; 99% the wife). Home Loan · The Taxpayers then acquired a property (Home) as tenants in common (1% the husband; 99% the wife). The Taxpayers initially jointly borrowed from a Bank to fund the deposit for this purchase (Bank Loan 2). The Taxpayers subsequently jointly borrowed from another bank (Bank 2) to fund the purchase of the Home and to repay Bank Loan 2 (Home Loan). · The Home Loan consisted of a number of loans with various fixed and variable interest rates. o Each of these loans is for a term of 30 years and require interest and principal monthly repayments. o The loans are each secured over Property A and the Home. · The Taxpayers have a joint deposit account with Bank 2 (Offset Account). Bank 2 is obliged to apply the balance of the Offset Account against the outstanding balance of a portion of the home loan when calculating the accrued daily interest on that loan. If the balance of account becomes completely offset, an offset account may be established on one of the other home loan accounts. Alternatively, lump sum payments may be made out of the Offset Account into the other home loan accounts while leaving the Offset Account balance to still be applied against the first portion of the home loan. Investment Property Loan · The Taxpayers jointly borrowed from Bank 2 through a residential investment property loan (IPL). The key terms of the IPL include the following: o interest rate: fixed for 3 years and variable thereafter; o repayments: interest only for 3 years and interest and principal thereafter; o security: Home and Property A; o term: 30 years. · The Taxpayers assert that the funds from the IPL were used to: o refinance 'the wife's share' (50%) of the outstanding Bank Loan 1; o to enable the wife to pay the husband an amount equal to 49% of the current market value for the 49% interest in Property A she acquired from him; and o pay legal fees, mortgage registration costs and land transfer registration costs relating to the purchase of the Home. · The Taxpayers assert that the husband used the proceeds from the sale of his 49% interest Property A to the wife to: o repay 'his share' (i.e. 50%) of Bank Loan 1; o contribute towards the purchase of the Home; and o pay the stamp duty on the purchase of the Home. Drawing of Home Loan and IPL · As described in three letters from Bank 2, the Home Loan and the IPL were drawn on the same day and the loan proceeds were combined with a contribution from the Taxpayers and various disbursements made. o The following disbursements were made from the above funds: · Annual package fee · Registration charges · Stamp Duty · Vendor of Home · Outstanding council rates · Outstanding water rates · Conveyance fees · Bank Loan 1 · Bank Loan 2 · Surplus funds (paid to Offset Account) · The Taxpayers do not expect to draw any further funds from the IPL prior to 30 June 2014. Rental of Property A · From the time of the above settlement, Property A was available for rent. The property was first rented at this time and has been either rented, or available for rent, ever since. · The Taxpayers expect Property A will continue to be rented or available for rent until 30 June 2014. · The Taxpayers do not expect to dispose of Property A prior to 30 June 2014. Line of Credit · The Taxpayers have recently jointly obtained a line of credit from Bank 2 (LOC). The key terms of the LOC include the following: o repayments: no repayments required provided the account balance remains below the credit limit; o security: Property A and Home; o no term specified. Operation of loans / other information Use of LOC to date · The LOC has currently only been used to pay various expenses relating to Property A (e.g. roof repairs, drainage repairs, gardening expenses, council rates, water charges, insurance, maintenance and land tax) (Rental Property Expenses). Use of LOC going forward · The Taxpayers will only use the LOC to pay the interest on the IPL each month, to pay the Rental Property Expenses and possibly to acquire other assessable income producing assets (e.g. shares). The Taxpayers believe they will obtain 'cash flow advantages' by using the LOC to pay all expenses associated with Property A. The Taxpayers describe the cash flow advantages as follows: The annual difference between the rent and expenses associated with the property is significant. This is an amount that taxpayers are required to pay out of their own pocket. Such a large amount has a significant impact on the taxpayers' personal savings and cashflow associated with their living expenses. Using the LOC ensures that all relevant expenses associated with holding the property can be met on time regardless of the taxpayers' personal circumstances at any given time. This gives the taxpayers peace of mind about the mortgage for the property and they only have to worry about meeting their own mortgage payment on time. In addition they can plan better for the future, establish savings for future use, gain confidence in investing and have the opportunity to grow their wealth sooner by having greater control and ability to meet their commitments. Managing cash flow to date · The Taxpayers deposited all their income (including salaries and rental income) into the Offset Account. The Taxpayers debited the Offset Account to pay private expenses, make the minimum (and some additional) repayments on the Home Loan, pay the interest on the IPL each month and to pay the interest on the LOC each month. · Some extra repayments have been made to the various components of the home loan (to the extent permitted by Bank 2). · Prior to entering the arrangement, the Offset Account balance fluctuated each month, however the balance remained at substantial credit balances. Managing cash flow going forward · The Taxpayers intend to reduce the balance of the Home Loan as soon as possible. They will continue to deposit all their income into the Offset Account. Additional repayments may be made to the Home Loan as savings, personal circumstances and bank policy permit. · The Taxpayers 'have not calculated the timeframe in which they expect to have paid off the Home Loan'. However, the Taxpayers 'expect to pay the [Home Loan] off sooner under the method described than they would normally have done, regardless of changing circumstances'. · The Taxpayers do not intend to make any principal repayments on the IPL until the Home Loan has been repaid. To enable this, the Taxpayers intend to negotiate further interest free periods on the IPL with Bank 2 once the initial 3 year interest free period ends. · The Taxpayers will not make any repayments (principal or interest) on the LOC until the Home Loan has been repaid. As a result, interest on the LOC will be capitalised and compounded. · The Taxpayers intend to apply for an increase in the LOC credit limit once it is reached. The Taxpayers believe Bank 2 will approve such an increase if there is a commensurate reduction in the 'redraw' capacity of the Home Loan. However, Bank 2 has not advised the Taxpayers to date of any circumstances in which it would increase, or consider increasing, the credit limit on the LOC. Other information The establishment and operation of the loan products in the above manner was suggested to the Taxpayers by their accountant (who is also their mortgage broker). The Taxpayers' accountant advised them that operating the loans in this way would reduce the private component of their debt sooner. The accountant also indicated that the 'operation of the accounts in the way described would lead to a reduction in [the Taxpayers'] tax liabilities'. According to the accountant, this reduction in tax would also 'help reduce the private component of debt faster and/or improve the personal and investment cash flow'.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1. | Income Tax Assessment Act 1936 Section 6. | Income Tax Assessment Act 1936 Section 92. | Income Tax Assessment Act 1936 Part IVA | Income Tax Assessment Act 1936 Section 177D. | Income Tax Assessment Act 1936 Section 177A. | Income Tax Assessment Act 1936 Section 177C. | Income Tax Assessment Act 1936 Section 177F.

Reasons for decision: Summary: Before considering the application of Part IVA, it is necessary to determine the application of section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) to the above facts. | Detailed Reasoning - Section 8-1 of the ITAA 1997: A deduction is allowed under section 8-1 of the ITAA 1997 for any loss or outgoing that is incurred in gaining or producing assessable income to the extent that it is not of a private, capital or domestic nature. The deductibility of interest is typically determined through an examination of the purpose of the borrowing and the use to which the borrowed funds are put ( Fletcher & Ors v. FC of T 91 ATC 4950; (1991) 22 ATR 613, FC of T v. Energy Resources of Australia Limited 96 ATC 4536; (1996) 33 ATR 52, and Steele v. FC of T 99 ATC 4242; (1999) 41 ATR 139). Accordingly, a deduction is generally allowed for ordinary interest incurred on funds borrowed that are used to acquire an assessable income producing asset. Interest on a new loan will be deductible if the new loan is used to repay an existing loan which, at the time of the second borrowing, was being used in an assessable income producing activity ( FC of T v. Roberts; FC of T v. Smith 92 ATC 4380 at 4388; (1992) 23 ATR 494 at 504). The principles governing the deductibility of compound interest are the same as those governing the deductibility of ordinary interest ( Hart v. Federal Commissioner of Taxation [2002] FCAFC 222, 2002 ATC 4608, (2002) 50 ATR 369). | Detailed Reasoning - Interest incurred on the IPL: The Taxpayers, as joint owners of Property A being in receipt of rental income jointly, constitute a 'partnership' (as defined in subsection 6(1)) (the Partnership). Property A will be rented, or available for rent, throughout the Relevant Income Years. An amount of the funds drawn from the IPL was used to refinance Bank Loan 1, which was used to acquire Property A. Therefore, this portion of the funds from the IPL was used by the Taxpayers for the purpose of gaining or producing their assessable rental income. The interest incurred on the portion of the outstanding balance of the IPL attributable to the refinancing of Bank Loan 1in each of the Relevant Income Years is an expense of the Taxpayers (as co-owners) in deriving their rental income and is therefore taken into account in calculating the 'net income' of the Partnership for the purposes of Division 5 of Part III (see Case 63/96 96 ATC 578). The Partnership is entitled to a deduction under section 8-1 of the ITAA 1997 in respect of the interest incurred on the portion of the outstanding balance of the IPL attributable to the refinancing of Bank Loan 1 in each of the Relevant Income Years (IPL Deductible Interest). The Commissioner considers that only this portion of the total amount drawn from the IPL has been used by the Taxpayers for the purpose of gaining or producing their assessable rental income. This is based on: · the fact that the IPL is a loan in joint names (and therefore the husband cannot be said to have jointly borrowed funds to pay himself in respect of the purported sale of his 49% interest in Property A to the wife); and · the disbursement letters from Bank 2, which clearly indicate that only a portion of the total borrowed funds were used in a way that related to Property A (i.e. the balance having been used for private purposes - namely the purchase of the Home). In calculating the portion of the outstanding IPL balance attributable to the refinancing of Bank Loan 1, any repayment of principal should be applied proportionately against the balance of amounts applied to income producing and non-income producing purposes respectively, at the time the repayment is made (see Taxation Ruling TR 2000/2 at paragraph 16). | Detailed Reasoning - Interest incurred on the LOC: During the Relevant Income Years the Taxpayers will use funds from the LOC to pay the interest on the IPL each month, pay the Rental Property Expenses and possibly to acquire other assessable income producing assets (e.g. shares). The interest incurred on the portion of the outstanding LOC balance attributable to the payment of interest on the IPL will be incurred in gaining or producing the co-owners' assessable income in the same proportion that the IPL Deductible Interest represents over the total interest incurred on the IPL in the Relevant Income Year. For example, if 25% of the interest incurred on the IPL is attributable to the refinancing of Bank Loan 1, then 25% of the interest incurred on the outstanding LOC balance attributable to the payment of interest on the IPL would be incurred in gaining or producing the Taxpayers' assessable rental income. Such interest incurred on the LOC is referred to below as the 'IPL Deductible LOC Interest'. Accordingly, subject to the application of Part IVA, the Partnership is entitled to a deduction under section 8-1 of the ITAA 1997 (for the purposes of calculating its 'net income' under Division 5 of Part III) in each of the Relevant Income Years in respect of: · the interest incurred on the portion of the outstanding LOC balance attributable to the payment of the Rental Property Expenses; · the IPL Deductible LOC Interest; and · the interest incurred on any portion of the outstanding LOC balance attributable to the purchase of any other jointly owned assessable income producing asset(s). | Detailed Reasoning - Part IVA: Part IVA is a general anti-avoidance rule. Part IVA gives the Commissioner the discretion to cancel a 'tax benefit' (or part of a 'tax benefit') that has been obtained, or would, but for section 177F, be obtained, by a taxpayer in connection with a scheme to which Part IVA applies. In broad terms, Part IVA will apply where the following requirements are satisfied: · there is a scheme (see section 177A); · a taxpayer has obtained, or would but for section 177F obtain, a tax benefit in connection with the scheme (see section 177C); and · the dominant purpose of a person who entered into or carried out the scheme, or any part of the scheme, was to enable the relevant taxpayer to obtain a tax benefit in connection with the scheme, or to enable the relevant taxpayer and another taxpayer or other taxpayers each to obtain a tax benefit in connection with the scheme (paragraph 177D(b)). The application of Part IVA depends on a careful weighing of all the relevant facts and surrounding circumstances of each case. Each of the requirements of Part IVA is discussed below in relation to the arrangement. | Detailed Reasoning - Scheme: There is a 'scheme' under subsection 177A(1) comprising the following course of action: · the establishment of the LOC according to its terms and conditions; · the Taxpayers' use of the LOC to pay the interest on the IPL; · the depositing of all the Taxpayers' cash in-flows into the Offset Account; and · the Taxpayers' decision not to make any repayments (including the payment of interest) on the LOC while its balance remains below its approved credit limit. The scheme was entered into or carried out by the Taxpayers and Bank 2. | Detailed Reasoning - Counterfactual: The formulation of what might reasonably be expected to have happened if the scheme had not been entered into or carried out (or 'counterfactual') is relevant in terms of identifying the tax benefit under section 177C and considering 'purpose' under paragraph 177D(b). Having regard to the facts, the Commissioner considers it might reasonably be expected that if the scheme had not been entered into or carried out, the following would have happened: · the Taxpayers would have met the interest payments on the IPL out of their own cash flow rather than use the LOC (the Counterfactual). The Counterfactual is less complicated than the scheme and satisfies the key commercial requirements of the arrangement. In addition, the Commissioner notes the Counterfactual is consistent with the Taxpayers' course of action prior to carrying out the scheme (i.e. to date the Taxpayers have only used the LOC to pay the Rental Property Expenses). | Detailed Reasoning - Tax benefit: Under paragraph 177C(1)(b), a tax benefit is obtained in connection with a scheme if a deduction is allowable to the taxpayer in relation to a year of income where the whole or a part of that deduction would not have been allowable, or might reasonably be expected not to have been allowable, to the taxpayer in relation to that year of income if the scheme had not been entered into or carried out. Under paragraph 177C(1)(a), a tax benefit is obtained in connection with a scheme if an amount would have been included, or might reasonably be expected to have been included, in the assessable income of the taxpayer if the scheme had not been entered into or carried out. | Detailed Reasoning - Tax benefit for Partnership: Under the Counterfactual, the Taxpayers would not have incurred any interest on the LOC referable to the payment of interest on the IPL and so the Partnership would not have been entitled to any deductions in respect of that. Accordingly, the relevant tax benefit obtained by the Partnership in connection with the scheme under paragraph 177C(1)(b) is the allowable deduction for such interest incurred on the LOC in each of the Relevant Income Years. | Detailed Reasoning - Tax benefit(s) for the husband and the wife: If the relevant interest deduction on the LOC reduces the net income of the Partnership (but for Part IVA) in one or more of the Relevant Income Years, the Taxpayers will each have obtained a tax benefit under paragraph 177F(1)(a) (i.e. the non-inclusion of their respective shares of that reduction in the net income of the Partnership in their respective assessable incomes under subsection 92(1) in each of those Relevant Income Years). If the relevant interest deduction on the LOC creates a partnership loss (but for Part IVA) in one or more of the Relevant Income Years, the Taxpayers will each have obtained a tax benefit under paragraph 177F(1)(b) (i.e. an allowable deduction for their respective shares of the partnership loss under subsection 92(2) in each of those Relevant Income Years). In addition, the Taxpayers will each also have obtained a tax benefit under paragraph 177F(1)(a) (i.e. the non-inclusion of their respective shares of the net income of the Partnership that would have arisen under the Counterfactual in their respective assessable incomes under subsection 92(1) in each of those Relevant Income Years). If the relevant interest deduction on the LOC increases the partnership loss (but for Part IVA) in one or more of the Relevant Income Years, the Taxpayers will each have obtained a tax benefit under paragraph 177F(1)(b) (i.e. an allowable deduction for their respective shares of the increase in the partnership loss under subsection 92(2) in each of those Relevant Income Years). | Detailed Reasoning - Weighing each of the eight factors in applying the purpose test in paragraph 177D(b): Paragraph 177D(b) requires the drawing of a conclusion about purpose from the eight objective matters identified in that provision. The conclusion to be reached is the conclusion of a reasonable person ( FC of T v. Spotless Services Ltd & Anor (1996) 186 CLR 404 at 421; 96 ATC 5201 at 5210). The provision does not require, or even permit, any inquiry into the subjective purpose or motive of the relevant taxpayer or others who entered into or carried out the scheme ( FC of T v. Hart & Anor [2004] HCA 26 at [65]; 2004 ATC 4599 at [65]). An objective purpose of the taxpayer of 'paying their home loan off sooner' does not prevent Part IVA from applying to the arrangement in question. As was noted in the joint judgment of the High Court in Spotless ((1996) 186 CLR 404 at 416; 96 ATC 5201 at 5206): A particular course of action may be...both 'tax driven' and bear the character of a rational commercial decision. The presence of the latter characteristic does not determine the answer to the question whether, within the meaning of Part IVA, a person entered into or carried out a 'scheme' for the 'dominant purpose' of enabling the taxpayer to obtain a 'tax benefit. Further, Gleeson CJ and McHugh J of the High Court noted in Hart ([2004] HCA 26 at [16]; 2004 ATC 4599 at [16]) that: ...a transaction may take such a form that there is a particular scheme in respect of which a conclusion of the kind described in s 177D is required, even though the particular scheme also advances a wider commercial objective. Callinan J in Hart ([2004] HCA 26 at [96]; 2004 ATC 4599 at [96]) similarly distinguished between objectives that are 'entirely irreproachable and proper' and the 'means adopted to achieve these results'. Therefore, the means by which the Taxpayers achieve their objective of 'paying off their home loan off sooner' may enliven Part IVA. The purpose test in paragraph 177D(b) is applied below in respect of the tax benefit obtained by the Partnership, the husband and the wife in connection with the scheme. The 'relevant taxpayer' in each case under section 177D is the Partnership, the husband and the wife respectively. | Detailed Reasoning - 177D(b)(i) - manner in which the scheme is entered into or carried out: The establishment and operation of the loans in the above manner was suggested to the Taxpayers by their accountant (who is also their mortgage broker). The accountant indicated that the Taxpayers would see a reduction in their tax liabilities if they managed the loans and cash flows as described above. According to the accountant, the Taxpayers' reduction in tax would help reduce the Taxpayers' private debt faster and improve their cash flow. The scheme involves the Taxpayers using the LOC to pay the interest on the IPL whilst depositing all their cash in-flows (including rent) into the Offset Account. Further, the Taxpayers will not make any repayments on the LOC until the Home Loan has been fully repaid. Interest on the LOC will thereby be capitalised and compounded. The Taxpayers will apply for an increase in the LOC credit limit (as needed) to enable this to occur. The manner in which the scheme is to be entered into or carried out is explicable only by the taxation consequences. For instance, apart from the purported availability of additional tax deductions for the relevant interest on the LOC, it makes little (if any) financial sense for the Taxpayers to, in effect, fund repayments on the Home Loan (or deposits into the Offset Account) using the LOC, which has a higher interest rate than the Home Loan. The Taxpayers have argued that the manner in which the scheme is to be entered into or carried out can be explained by the cash flow advantages it provides them (i.e. not having to fund the interest on the IPL out of their net cash flow). An analysis of the Taxpayers' cash flows prior to entering the arrangement indicates that the Taxpayers always maintained a significant Offset Account balance and generated significant net cash inflows (even after paying the interest on the IPL). In addition, there was a significant overall net cash inflow for the Taxpayers during that period. The Taxpayers applied this overall net cash inflow towards making a large amount of additional repayments to the CLs over the same period. This course of conduct does not suggest that the Taxpayers had a liquidity problem that needed to be alleviated through the use of the LOC to pay the interest on the IPL. Indeed, the Taxpayers had so much surplus cash they were able to make significant additional repayments on the Home Loan. This factor points toward the taxpayers having entered into or carried out the scheme for the dominant purpose of enabling the Partnership, the husband and the wife each to obtain a tax benefit in connection with the scheme. | Detailed Reasoning - 177D(b)(ii) - form and substance of scheme: A key feature of the scheme is the Taxpayers' use of the LOC to pay the interest on the IPL. This results in interest on the IPL, in effect, being capitalised and thus its payment deferred in order to enable the Taxpayers to repay an equivalent amount on the Home Loan (or deposit an equivalent amount into the Offset Account). Therefore, the real effect and substance of the scheme is to purportedly make the payment of interest on the capital sum paid in reduction of the Home Loan tax deductible. The substance of the scheme points toward the Taxpayers having entered into or carried out the scheme for the dominant purpose of enabling the Partnership, the husband and the wife each to obtain a tax benefit in connection with the scheme. | Detailed Reasoning - 177D(b)(iii) - time scheme was entered into and the period during which the scheme was carried out: The Taxpayers obtained the LOC from Bank 2 and propose to commence using it to pay the interest on the IPL upon receipt of a favourable private ruling from the Commissioner. The Taxpayers propose to carry out the scheme throughout the Relevant Income Years until such time as the Home Loan is fully repaid. That is, the scheme will only last for the period during which the Taxpayers have non-deductible interest expenses. Once the Home Loan is repaid the Taxpayers are likely to revert to making the payments on the IPL out of their own cash flow (rather than using the LOC) - as they have done prior to entering the scheme. This factor points toward the Taxpayers having entered into or carried out the scheme for the dominant purpose of enabling the Partnership, the husband and the wife each to obtain a tax benefit in connection with the scheme. | Detailed Reasoning - 177D(b)(iv) - income tax result achieved by scheme: The income tax result achieved by the scheme (but for Part IVA) when compared with the Counterfactual is the availability of additional tax deductions for the Partnership in each of the Relevant Income Years for part of the interest incurred on the portion of the outstanding LOC balance attributable to the use of the LOC to pay the interest on the IPL. Under the Counterfactual, such interest deductions would not have arisen. The availability of these additional tax deductions for interest under the scheme significantly reduces the income tax payable by each of the Taxpayers in each of the Relevant Income Years. This factor strongly points toward the Taxpayers having entered into or carried out the scheme for the dominant purpose of enabling the Partnership, the husband and the wife each to obtain a tax benefit in connection with the scheme. | Detailed Reasoning - 177D(b)(v) - change in financial position of the taxpayer resulting from the scheme: The effect of the scheme is that the Taxpayers are borrowing funds (via the LOC) to pay interest on the IPL in order to deposit an equivalent amount of their cash-flow into the Offset Account (or repay an equivalent amount on the Home Loan). That is, the increase in the LOC balance is matched by an equal reduction in the balance (or effective balance) of the Home Loan. The Taxpayers' overall debt remains the same. The Taxpayers' financial position (but for the tax saved) is no better than under the Counterfactual. Indeed, as the Taxpayers are paying a higher interest rate on the LOC than on the home loan their financial position under the scheme (but for the tax saved) is worse than under the Counterfactual. This factor strongly points toward the Taxpayers having entered into or carried out the scheme for the dominant purpose of enabling the Partnership, the husband and the wife each to obtain a tax benefit in connection with the scheme. | Detailed Reasoning - 177D(b)(vi) - change in financial position of any connected person resulting from the scheme: Bank 2's financial position is marginally better under the scheme when compared with the Counterfactual. Under the scheme, Bank 2's total lending exposure is the same as under the Counterfactual but it derives slightly more interest income across the loan products. This is because the interest rate on the LOC is higher than the home loan. On balance, this factor is neutral in indicating whether the Taxpayers entered into or carried out the scheme for the dominant purpose of enabling the Partnership, the husband and the wife each to obtain a tax benefit in connection with the scheme. | Detailed Reasoning - 177D(b)(vii) - any other consequences of the scheme for the taxpayer or any connected person: The Home has been used as security for all three loans (i.e. Home Loan, IPL and LOC). Accordingly, the Taxpayers will not actually own the Home unencumbered any faster under the scheme than would have been the case if they had not entered into the arrangement. There are no other consequences of the scheme being entered into or carried out for the Taxpayers or any connected person. This factor points toward the Taxpayers having entered into or carried out the scheme for the dominant purpose of enabling the Partnership, the husband and the wife each to obtain a tax benefit in connection with the scheme. | Detailed Reasoning - 177D(b)(viii) - nature of the connection between the taxpayer and persons affected by the scheme: The Taxpayers have a borrower/lender relationship with Bank 2. This factor is neutral in indicating whether the Taxpayers entered into or carried out the scheme for the dominant purpose of enabling the Partnership, the husband and the wife each to obtain a tax benefit in connection with the scheme. | Detailed Reasoning - Conclusion as to purpose after considering the eight factors: While two factors are neutral, the six others (in particular, the manner in which the scheme was entered into or carried out, the change in the Taxpayers' financial position and the income tax result achieved by the scheme) clearly point toward the conclusion that the Taxpayers entered into or carried out the scheme for the dominant purpose of enabling the Partnership, the husband and the wife each to obtain a tax benefit in connection with the scheme. Accordingly, consideration of all the eight factors together leads to the conclusion that the Taxpayers entered into or carried out the scheme for the dominant purpose of enabling the Partnership, the husband and the wife each to obtain a tax benefit in connection with the scheme. | Detailed Reasoning - Conclusion on the application of Part IVA: The Partnership, the husband and the wife have each obtained a tax benefit in connection with a scheme to which Part IVA applies. The Commissioner is entitled to make determinations under section 177F as set out below. | Detailed Reasoning - Part IVA Determination for Partnership: The Commissioner is entitled to make a determination under paragraph 177F(1)(b) that any deduction for the interest incurred on the portion of the outstanding LOC balance attributable to the use of the LOC to pay the interest on the IPL shall not be allowable to the Partnership (for the purpose of calculating its 'net income' under Division 5 of Part III) in each of the Relevant Income Years. | Detailed Reasoning - Part IVA Determination(s) for Husband: If any deduction for the interest incurred on the portion of the outstanding LOC balance attributable to the use of the LOC to pay the interest on the IPL reduces the net income of the Partnership (but for Part IVA) in one or more of the Relevant Income Years, the Commissioner is entitled to make a determination under paragraph 177F(1)(a) that the husband's share of that reduction in the net income is to be included in his assessable income in each of those Relevant Income Years. Under subsection 177F(2) that amount shall be deemed to be included in his assessable income by virtue of subsection 92(1). If any deduction for the interest incurred on the portion of the outstanding LOC balance attributable to the use of the LOC to pay the interest on the IPL creates a partnership loss (but for Part IVA) in one or more of the Relevant Income Years, the Commissioner is entitled to make a determination under paragraph 177F(1)(b) that the husband's share of that partnership loss shall not be an allowable deduction to him in each of those Relevant Income Years. In addition, the Commissioner would make a determination under paragraph 177F(1)(a) that the husband's share of the net income of the Partnership that would have arisen had the scheme not been entered into or carried out is to be included in his assessable income in each of those Relevant Income Years. Under subsection 177F(2) that amount shall be deemed to be included in the husband's assessable income by virtue of subsection 92(1). If any deduction for the interest incurred on the portion of the outstanding LOC balance attributable to the use of the LOC to pay the interest on the IPL increases the partnership loss (but for Part IVA) in one or more of the Relevant Income Years, the Commissioner is entitled to make a determination under paragraph 177F(1)(b) that the husband's share of that increase in the partnership loss shall not be an allowable deduction to him in each of those Relevant Income Years.

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