Private ruling: Interest expenses
Published: October 2011
Ruling period: Income year ended 30 June 2010 | Income year ended 30 June 2011 | Income year ended 30 June 2012 | Income year ended 30 June 2013
Date scheme commenced: 1 July 2009

Ruling: Q1: 1. Is all of the interest, including capitalised interest, on the investment line of credit facility (as described in the facts below) deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A3: The Commissioner declines to rule on this issue.

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. Investment Portfolio You and your spouse acquired an investment portfolio using money you borrowed under your investment line of credit. This comprised mainly $X worth of managed funds and shares and $X a small cash deposit. You own these shares in joint names and in equal shares. The legal and equitable title to the shares is the same. From time to time you have rebalanced your portfolio, disposing of some investments and substituting them for other investments. Your investment activity does not amount to a business of share trading or investing. At the time of acquiring this portfolio of investments you expected to derive: · assessable income in the form of dividends, interest and trust distributions · imputation credits on which you will be able to claim a tax offset · A net capital gain on your disposal of the investment portfolio which will be included in your assessable income. Based on the evidence available, you intend to dispose of this investment portfolio in approximately 2019. This is evident from the statements made to the Commissioner and the Statement of Advice prepared for you by your advisor. Funding of your investment portfolio and expenses associated with it You funded the acquisition of your investment portfolio by borrowing $X under your investment line of credit. At 22/9/10 when this line of credit was opened the interest rate was X%. Under the terms of the line of credit when first taken out, you were obligated to make repayments of interest. Beyond this, provided the balance owing is less than your credit limit you were not required to make any repayments on this line of credit. The requirement to make repayments of interest on this loan was an error made when the line of credit was setup by your broker. It was brought to your attention later by your bank who wrote to you indicating that you had failed to make any of the required repayments. The line of credit was intended to have no requirements to make repayments of any kind. From the evidence available to us, you subsequently did not start making any payments of interest required. Given this, it is inferred that you altered the terms of the line of credit with the bank so that you were not required to make any repayments on it unless you exceed the limit of the facility. While you are not required to make any repayments on your line of credit, you will not do so until you have repaid your home loan. This will be in approximately 2017. Until this time the interest on the line of credit will capitalise. Home Loan At the same time you borrowed funds to acquire your investment portfolio you also refinanced your home loan. You intend to use the income derived from the investment portfolio to make additional repayments on your home loan. This will result in you reducing the debt used to refinance your previous home loan and the amount of interest you incur on that loan. It will allow you pay your home loan faster than you otherwise would be able to. You expect this to occur during 2017. According to the statement of advice prepared for you by your advisor, you intended to pay all your investment income into your home loan. The documentation provided indicates that you have in fact done this bar a small amount of income from certain investments in your investment portfolio that is paid into your account. This amount is necessary to pay for the fees you must pay the fund manager in respect of your account and maintain the necessary minimum balance for your account. Income from your investment portfolio According to the Statement of advice prepared for you by your advisor you were advised to expect to derive annual assessable income from your investment portfolio of approximately $X per annum. According to the documents provided, between 20XX and 20XX, your investment portfolio actually generated assessable income of $Y during the first twelve months you held it. Expenses relating to your investment portfolio According to the financial plan prepared for you by your advisor, you were advised to expect to incur the following expenses in relation to your investment portfolio: $Z p.a. in annual fees payable to your advisor (This also relates to other aspects of your finances as discussed below) $W p.a. in management fees payable in respect of your account payable to the fund manager $T p.a. in interest on your investment line of credit Over the life of your investment portfolio arrangement you were advised to expect these amounts to increase at the rate of inflation - 3% p.a. The documents provided indicate that the annual fees payable to your advisor and fund manager have been incurred as expected over the first 12 months you held your investment portfolio arrangement. The interest has, however, varied slightly from that predicted due to changes in the prevailing interest rates which were lower than the estimates used in the preparation of your financial plan. During the first 12 months you held your investment portfolio arrangement you only incurred interest of $R on your investment line of credit. According to the documentation provided, the ongoing fee you pay to your advisor encompasses educating you on managing your investment portfolio and personal expenses, monitoring and advising on your changing circumstances, factors that will affect your financial position and your personal spending habits and advising you whether you are meeting your budgeted spending targets. It follows that part of this fee does not relate to management of the investment portfolio. In the first 12 months since acquiring your investment portfolio, you have incurred expenses of $Q that have a clear connection to earning income in relation to your investment portfolio - that is the interest on the line of credit and the account keeping fee. In addition to this, a portion of the $Z in annual fees you pay your advisor also relate to the management of your portfolio. For the purposes of this advice it will be assumed that this is 50% of the fee or $Z/2. However this 'reduction' in the amount of expenses relating to the investment portfolio arrangement, is ultimately immaterial. The analysis below shows that even at this lower rate the deductions incurred in relation to gaining income from the arrangement will exceed the amount of assessable income derived from it. If a greater amount was to be shown to be attributable to the investment portfolio, this would simply have the effect of making the excess greater. Based on the advice prepared for you by your advisor, prior to entering the arrangement, you expected to incur ongoing fees and expenses in relation to your investment portfolio of approximately $P p.a. Taking away the portion of the $Z fee payable to your advisor that is assumed to be related to monitoring your personal spending habits and personal expenses, you reasonably expected to incur expenses of $N p.a. in relation to your investment portfolio. For the purposes of this advice on the basis of the assumption that only $Z/2 of the $Z annual fee payable to your advisor relates to your investment portfolio, you in fact incurred expenses of $M in relation to your investment portfolio (the remainder being for private purposes such the monitoring of private expenditure). Disposal of the Investment Portfolio in 2019 Based on the documentation provided, it is the opinion of the Commissioner that you intend to sell your investment portfolio in 2019. This is for the following reasons: This is indicated as your intent in point 4 of your response to questions December 20XX This is part of the strategy you were advised to enter by your advisor on February 20xx y which you have substantively followed except for some minor variations, such as paying a small part of your investment portfolio income into your account rather than your home loan. According to the projections in your statement of advice from your advisor, in the 2019/20 income year when you intend to dispose of your investment portfolio. You expect it to be worth $L. At this time you expect the balance owing on your investment line of credit to be $K. This was based on the following assumptions: · A simple interest rate on the line of credit of J% · Inflation of 3% p.a. · GDP growth of 3.5% p.a. · A return of income of H% p.a. · A growth rate on your investment portfolio of G% According to your statement of advice from your advisor you will repay the investment line of credit using a combination of the proceeds from disposal of your share portfolio and a part of a lump sum drawn from your superannuation. Facts extrapolated from an analysis of the information provided Based on: · your investment portfolio strategy was based on the facts outlined above and in appendix 1 · that you do not make any repayments on the line of credit until such time as you have disposed of your investment portfolio · only $Z/2 of the advisor's fee related to your investment, and · And a holding period of 10 years, · when entering the arrangement you reasonably expected to receive assessable income from the investment portfolio totalling $F and be entitled to claim deductions of $D. These expected deductions exceed the expected income from the investment portfolio by $C. See Appendix 1 which sets out the calculation of these figures. For the next analysis, on the same assumptions set out above, but adjusted to reflect · an income yield equal to the B% yield from your investment portfolio that was obtained in the first year you held it and · an interest rate of A% on your investment line of credit was to apply over the life of the investment portfolio- being the simple % of interest based on the opening balance of the investment line of credit. On these modified assumptions you would reasonably expect to derive assessable income from the arrangement of $E and deductible outgoings of $O. This still results in the deductions expected from the arrangement, exceeding the income expected from the arrangement by $U. It is acknowledged that the analysis above does not take into account the effect of repayments on the line of credit that you have stated you intend to start making repayments once your home loan has been repaid in approximately 2017. Without an indication as to the amount of the repayments it is not possible to accurately model the likely interest expense over the last two years of the arrangement. However it is noted that it is highly unlikely the level of repayments being made will significantly reduce the amount of interest payable. For example, assuming an AA% interest rate, for every $BB of repayments made, the interest incurred on your home loan will fall by approximately $CC p.a. According to both calculations shown in appendixes 1 and 2, even if the entire loan was repaid in 2017, the investment portfolio arrangement would still not produce a greater amount of assessable income, than the deductions incurred to earn it by the time it is intended to be disposed of in 2019. For instance based on the assumptions in appendix one, this would save only $DD in interest over the final 2 years of the arrangement. This would reduce the amount by which the deductions exceed the assessable income to $EE. On the assumptions used for the calculation in Appendix 2, which is based on what happened during the first year of your undertaking the arrangement, repaying the entire loan in 2017, would save $FF in interest. This would reduce the amount by which the deductions exceed the assessable income to $GG. Thus the commencement of repayments in year 8 of the arrangement could not, of itself, because the investment portfolio arrangement to have a reasonable prospect of producing more assessable income from the investment portfolio arrangement than the amount of deductions incurred in relation to it given the investment period. It would, therefore, not affect the conclusions expressed below. There are several ways the expected assessable income from your investment portfolio arrangement could exceed the expenditure that was reasonably expected to be incurred and deductible in order to obtain it - based on the decision to sell the portfolio in 2019: · The interest rate on the investment line of credit being cut to an average of HH% p.a. or lower over the life of the investment portfolio. · You exit any arrangements requiring them to pay any of the fees in relation to the investment portfolio and the interest rate on the investment line of credit being cut to an average JJ5.7% p.a. or lower over the life of the investment portfolio. · You make repayments on the line of credit sufficient to reduce the interest in respect of your investment portfolio by $KK. These repayments total approximately $LL p.a. payable from the time you entered the arrangement. · The income yield will increase substantially. · Or some combination of the above events. It is noted these scenarios or a combination of them that would give rise to more assessable income than expected deductions from the arrangement are all considered highly unlikely, and therefore outcomes that are not reasonable to expect for the following reasons: · You don't intend to make any repayments on your investment line of credit until year 8. · Based on historical average interest rates, a sustained interest rate of HH% over the life of the arrangement is highly unlikely. · To reduce the interest liability to a level where the arrangement would be reasonably expected to produce more assessable income than deductions, you would practically need to repay the line of credit on a principle and interest basis over ten years. Based on an interest rate of MM % calculated daily and compounded monthly and fortnightly repayments this would require repayments per year totalling $NN. This is more than the projected additional home loan repayments you would be making under your arrangement of $PP. Repaying the investment line of credit to a point where it becomes tax positive this would significantly increase your tax liability over the life of the project. Based on the $KK by which you expect your deductions to exceed your assessable income from the arrangement, this would amount to an additional income tax liability of $QQ over the life of the arrangement. Without changing substantial elements of your arrangement the projected cash flows in the forecast cash flow do not disclose where you could find the $RR necessary to make such repayments. Based on the actual outcomes from the first year of your investment portfolio, which incorporate two of the significant changes (increased income and decreased interest expense), and assuming these results were achieved over the ten year investment period, your expected deductions would still exceed the expected assessable income from the investment portfolio. Entering the arrangement The documentation provided indicates that when you sought advice from your advisor which led to your entering into your current arrangements, your goals were to · Maintain your current lifestyle · Get ahead financially · Undertake renovations to your home costing $SS · Give your self the flexibility to travel · Repay your home loan and existing investment loans as soon as possible · Retire in 2019 · To manage and increase control over your living costs · To minimise your tax · Ensure your investments are simplified and achieve capital growth at least equal to inflation · To ensure you have a net income in retirement of $TT p.a. The advice you received from your advisor places a considerable emphasis on the tax benefits of the arrangements. It seems clear that one of the purposes of your advisors was to enable you to get a tax benefit by way of deductions and imputation benefits.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1 (1)(a) | Income Tax Assessment Act 1997 Section 8-1 (2)(b) | Income Tax Assessment Act 1997 Sub-section 207-A | Income Tax Assessment Act 1936 Part IVA | Income Tax Assessment Act 1936 Section 90

Reasons for decision: Summary: While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision. You funded the purchase of your investment portfolio by way of your investment line of credit. This is in both your names and you are both jointly and severally liable to repay it. The shares and interests in managed funds in your investment portfolio are held in joint names, in equal shares, which were funded by a joint loan. It follows that you are both legally and equitably the owner of 50% of that share portfolio, you each having contributed 50% of the purchase price of the portfolio: Dinsdale v Arthur [2006] NSWSC 809 at paragraph 11 You are in receipt of income from your investment portfolio jointly. You are therefore in a tax law partnership and because your interest in the partnership is 50%, you are therefore entitled to a deduction for 50% of the partnership losses and are assessable on 50% of the partnership's net income under section 92 of the ITAA 1936: See TR 93/32 and FCT v McDonald (1987) 18 ATR 957; 87 ATC 4541; section 995(1) ITAA 1997. You must therefore work out what the net income of the partnership or the partnership loss as defined in section 90 of the ITAA 1936. Any, dividends, franking credits and assessable trust distributions you receive from the shares and managed funds is partnership income. The interest on the line of credit, account fees payable to the fund manager and the ongoing fee payable to your advisor in respect of your investment portfolio are all partnership expenses and taken into account in working out the net income or partnership loss of your tax law partnership and not your own assessable income: FCT v McDonald (1987) 18 ATR 957; 87 ATC 4541. You are therefore not entitled to a deduction for the interest incurred on your investment line of credit, account fees payable to the fund manager and the ongoing fee payable to your advisor in respect of your investment portfolio are all partnership expenses. You are however entitled to a deduction for your share of your tax law partnership's partnership loss in a year of income. | Detailed Reasoning - Position of your tax law partnership: Under the first limb of section 8-1(1)(a) of the ITAA 1997, you are entitled to a deduction for an outgoing if it was incurred in the course of gaining or producing your assessable income. An expense satisfies this limb of 8-1 generally, if the occasion for it being incurred was productive of your assessable income or, if none was produced, would be expected to produce assessable income. See Lunney v. Commissioner of Taxation [1958] HCA 5; (1958) 100 CLR 478; Ronpibon Tin N.L. v F.C of T (1949) 78 CLR 47; TR 95/25 at paragraph 22 | Detailed Reasoning - Deduction for Interest on your investment line of credit: Whether interest on money borrowed satisfies this test depends on the character of the interest incurred. The character of interest flows from the purpose of the borrowing. In a simple case this is generally determined by reference to what the borrowed money was used for. To the extent the money was borrowed for multiple purposes, a reasonable apportionment between the different purposes is required. The character of compound interest is to be determined by reference to the same principles as ordinary interest: See Hart v FCT (FFC) and TD 2008/27 . That is, what was the purpose of borrowing the money. Here, as money borrowed under the investment line of credit was used to purchase an income producing assets (the shares and interests in managed funds in your investment portfolio) is on its face, productive of assessable income. The interest and compound interest will therefore be deductible under section 8-1 subject to the application of the principle in Fletcher's case discussed below. | Detailed Reasoning - Deduction for the accounting keeping fee: This fee is clearly incurred in the course of gaining or producing the assessable income of your tax law partnership and will be deductible to your tax law under section 8-1 for the reasons set out in TD 95/60; F C of T v. Green (1950) 81 CLR 313, subject to the application of the principle in Fletcher's case discussed below. | Detailed Reasoning - Deduction for the ongoing financial planning fee payable to your advisor: The exact scope of the services provided in relation to the ongoing financial planning fees payable to your advisor is not clear. However, from the documentation provided, it would appear that there are two distinct services being provided in return for this fee. The first in the monitoring and advice in relation your and your spouse's private spending. The second is the ongoing monitoring and advice in relation to your investment portfolio. To the extent the fee relates to the ongoing monitoring and advice in relation to your and your spouse's private spending, the fee is clearly not incurred in the course of gaining or producing your assessable income. It is also private and domestic in nature, and will therefore not be deductible under section 8-1, as it fails the positive limb in paragraph 8-1(1)(a) and is also denied deductibility by paragraph 8-1(2)(b). To the extent the fee relates to the monitoring and ongoing advice in relation to the ongoing management of your investment portfolio it would, subject to application of the principle in Fletcher's case discussed below, be deductible under section 8-1 for the reasons set out in TD 95/60; F C of T v. Green (1950) 81 CLR 313. It is not clear from the facts what the portion attributable to either service is. However for the discussion below it is assumed that as described in the facts above, it is 50% for the monitoring of private spending and 50% for the provision of advice in relation to the investment portfolio. The proper apportionment is one that should be clarified prior to the issue of a ruling. | Detailed Reasoning - Application of the principle in Fletcher to the above deductions: Where an income producing arrangement is reasonably expected to involve the incurrence of outgoings that are, on their face, expected to be deductible, that are greater that the amount of the assessable income it is expected to produce, it is permissible to consider the taxpayer's subjective purpose and the direct and indirect objects and advantages the taxpayer sought in incurring outgoings in determining the purpose of the outgoing: Fletcher & Ors v FCT 91 ATC 4950 at 4958. It is also permissible to take into account the purpose of the taxpayer's advisors if they were advised to enter the arrangement and those persons who acted on their behalf in undertaking the arrangement: Fletcher & Ors v FCT 91 ATC 4950 at 4961. If taking into these factors into account, it is to be concluded the outgoing was incurred in the pursuit of an object independent of the production of assessable income the deduction would need to be apportioned between the pursuit of assessable income and the pursuit of the other objects on a reasonable basis. To the extent the arrangement generates assessable income a deduction is available in respect of the outgoings incurred in its production: Fletcher & Ors v FCT 91 ATC 4950 at 4959. As discussed above, over the limited period you intend to hold the investment portfolio it is reasonable to expect that the prima facie deductible outgoings you will incur under your income producing arrangement, will exceed the amount of assessable income they will produce from your investment portfolio arrangement. It is therefore permissible to consider the indirect and direct objectives and advantages you sought by incurring the expenditure and your subjective purpose in carrying out the arrangement. As noted above, these include: · Maintaining your current lifestyle · Getting ahead financially · Undertaking renovations to your home costing approximately $SS · Giving yourself the flexibility to travel · Repaying your home loan and existing investment loans as soon as possible · Retiring in 2019 · To manage and increase control over your living costs · To minimise your tax · Ensure your investments are simplified and achieve capital growth at least equal to inflation. · To ensure you have a net income in retirement of $TT p.a. Considered in isolation and ignoring any tax and imputation benefits you receive as a result of it, your investment arrangement makes no sense from a commercial or investment perspective given it makes a significant loss. For this reason it is incapable of helping you achieve any of your stated goals, in the absence of any tax or imputation benefits. The arrangement only makes sense when the following consequences are factored into the analysis: · It allows you to effectively convert an existing amount of non-deductible debt - i.e. your home loan, on which you would incur interest on regardless of whether you entered the arrangement, into 'deductible debt', as a result of your making additional payments on your home loan and none on your investment line of credit. That is by not making any repayments on your investment line of credit and directing the net annual cash flows from your investment portfolio into your home loan, rather than the investment line of credit, you reduce your home loan debt, and increase the amount owing on the investment credit line by an equivalent amount, reducing the amount of interest you must pay on your home loan. · It is reasonably expected that the arrangement will be wound up prior to its making a profit. · The ability to make a concessionally taxed profit on the disposal of the investments in your investment portfolio i.e. is they will be discount capital gains. | Detailed Reasoning - The tax deductions and imputation benefits associated with the arrangement: The ability to claim a deduction and reduce your tax bill now in respect of outgoings you incur, but will not discharge until you start making repayments on the line of credit in 2017 or later. Your and your advisor's clearly articulated intention of enabling you to obtain a tax deduction and to further your private and domestic goals stated above that are not productive of assessable income. The ability to free up cash flow to pursue your private goals described above. In light of these considerations, your investment portfolio arrangement makes sense. While in form the investment line of credit is being used to fund the purchase of income producing assets, in substance, its effect and purpose is to finance private, non-deductible expenditure. Based on the actual results from the first year of your portfolio (see appendix 2), the tax and imputation benefits you sought and obtained as a result of the investment portfolio arrangement affect its profitability in the following way: · All the income you derive from the arrangement will be sheltered from tax because of the deductions associated with the arrangement. This leaves excess deductions available to reduce the tax that would otherwise be payable on your other taxable income. Over the life of the arrangement the net amount of tax saved is $WW · The untaxed part of your discount capital gain on the disposal of your share portfolio is $XX. The amount of the gain received and not taxed under par 301 of the Income Tax Assessment Act 1997 · The imputation benefits offset available under Division 207, based on the assumptions set out in appendix 2 would offset an additional $YY of tax payable. It also results in an additional amount of tax payable of $ZZ, resulting in a net tax saving of $AAA. On the assumptions set out in Appendix 2, the arrangement would result in net tax saved plus non-assessable gains of $BBB over the life of the arrangement. As a result in this circumstance the arrangement makes a net economic gain of $CCC. This does not take into account the value of any interest saved on your home loan as a result of your entering the arrangement. Based on the model in the statement of advice you received from your advisor, (see Appendix 1), the tax and imputation benefits you sought and obtained as a result of the investment portfolio arrangement affect its profitability in the following way: · All the income you derive from the arrangement will be sheltered from income tax because of the deductions associated with the arrangement. This leaves excess deductions available to reduce the tax that would otherwise be payable on your other taxable income. Over the life of the arrangement the net amount of tax saved is $DD · The untaxed part of your discount capital gain on the disposal of your share portfolio is $EEE. The amount of the gain received and not taxed. · The imputation benefits offset available under Division 207, based on the assumptions set out in appendix 2 would offset $FFF of tax payable. It would also result in an additional amount of tax payable of $GGG, resulting in a net tax saving of $HHH. On this assumption the arrangement would result in net tax saved plus non-assessable gains of $JJJ. As a result in this circumstance the arrangement would still make a net loss of $KKK from an economic point of view - not taking into account the interest saved on your home loan attributable to the arrangement. When the interest saved on your home loan as a result of this arrangement is taken into account, the arrangement results in a net economic gain. According to your advice from your advisor, as a result of this and other arrangements you have entered into you expected to make additional repayments above what you were paying prior to your entering the arrangement of $LLL p.a. on your home loan. As a result of your entering the investment portfolio arrangement, you save a net $MMM in tax per annum that you would otherwise have had to pay as a result of the deductions and franking credits available under the arrangement in the first year of the arrangement. Prior to entering the arrangement, based on the figures in your advice from your advisor, and the opening balance of your home loan being $NNN and a remaining term of PPP years in the absence of your overall arrangements. Under your arrangements you expect to repay your home loan in 2017. This requires net additional payments of $QQQ p.a. above your minimum required repayments. As a result of the totality of your arrangements (including additional payments you were making prior to entering the arrangement and additional payments you can make as a result of other tax effective arrangements you have entered), you will save a total of $RRR in interest on your home loan - including additional payment you were making prior to entering your investment portfolio arrangement. The amount of additional repayments made possible as a result of the arrangements / the total additional repayments above the minimum repayments on your home loan ($SSS/$TTT) or VVV% of the interest savings can be attributed to the investment arrangement. It follows that there is a cumulative saving of interest on your home loan of $WWW, as a result of the arrangement. This results in the arrangement making you a net economic gain of $XXX - being the sum of tax savings and the savings of interest on your home loan attributable to the arrangement. Without these benefits the arrangement would result in an economic loss. It follows that the outgoings you incur in relation to it are not genuinely, but are colourably incurred in order to produce assessable income. That is, while they are ostensibly incurred in order to produce assessable income, they are also incurred for the purpose of generating tax deductions and tax offsets under subdivision 207-A of the ITAA 1997 and allowing you to repay your home loan faster and achieving your other personal goals stated above, such as maintaining your lifestyle. Neither of these later objects can be said to be productive of your assessable income, and if they are, they are clearly private and domestic in nature. Under the principles set out in Fletcher's case, it follows that to the extent that you derive assessable income from your investment portfolio in an income year, the interest on your investment line of credit and management fees you incur in relation to it are incurred for the purpose of producing assessable income and they will be deductible to your tax law partnership under section 8-1 for the reasons discussed above. Beyond this, they are properly characterised as being incurred for the purpose of obtaining tax deductions and repaying your home loan faster or achieving other personal goals and will not be deductible under section 8-1. It follows that part of the fees and interest incurred can be said to be productive of assessable income in accordance with the principles set out in Fletcher. That part is the amount of the fees and interest incurred in an income year in relation to your investment portfolio to the extent they do not exceed the amount of assessable income generated in that income year from your investment portfolio. To the extent your expenses under the arrangement in a year exceed the income generated in that year, they are not deductible as they are not incurred in the course of gaining or producing assessable income. By way of illustration, if the management fees and interest you incur in an income year total $YYY, and the assessable income generated by the arrangement is $ZZZ, you will be entitled to a deduction for $ZZZ of the interest and fees. This excess to be denied should be apportioned on a reasonable basis across all the expenses incurred in relation to your investment portfolio. This would be in proportion to the amount of each expense relative to the total expenses. That is if the interest comprised 50% of the total expenses in the example above and the fees 50%: 50% of the excess deductions of $ZZZ, $ZZZ/2 should be applied to reduce the deduction for the interest outgoing. The remaining $ZZZ/2 of the excess should be applied to reduce the deduction for the fees. | Detailed Reasoning - Part IVA and other provisions: * All legislative references in this section are to the ITAA 1936 unless otherwise stated. Because your tax law partnership is not entitled to a deduction under section 8-1 of the ITAA 1997 for your interest and management fees incurred in relation to your investment portfolio to the extent they exceed your assessable income from the investment portfolio, Part IVA of the ITAA 1936 has no application. The Commissioner will also not make a ruling on 'any other provision' not identified by you: Paragraph 39 of Taxation ruling TR 2006/11. The following analysis represents the Commissioner's opinion as to the application of Part IVA, if you were entitled to the deduction under section 8-1 for the full amount of the interest and fees in relation to your investment portfolio. Part IVA is a general anti-avoidance rule. Part IVA gives to 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 · a taxpayer has, or would obtain, but for section 177F, a tax benefit in connection with the scheme · the dominant purpose of entering into or carrying out the scheme, or any part of the scheme, was to enable the relevant taxpayer and/or another taxpayer to obtain a tax benefit in connection with the scheme. The application of Part IVA depends on a careful weighing of all the relevant facts and surrounding circumstances of each case. Each of these requirements is discussed below in relation to your arrangement. | Detailed Reasoning - Scheme: A scheme is defined under subsection 177A(1) as any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and any scheme, plan, proposal, action, course of action or course of conduct. Based on the facts in the ruling application, the scheme under subsection 177A(1) includes: · the establishment of the investment line of credit · the acquisition of your investment portfolio · the crediting of all income from your investments, and an amount sourced from your salary and wages to your home loan · your not making any repayments (including the payment of interest) on the investment line of credit other than in the last 2 years you hold the portfolio. You disposing of the investment portfolio in approximately 2019. | Detailed Reasoning - Tax benefit: The identification of a tax benefit in respect of this scheme requires a consideration of what would have happened or might reasonably be expected to have happened if this scheme had not been entered into or carried out. This reasonable expectation forms the background against which the objective ascertainment of the dominant purpose occurs. 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, you would not have entered the arrangement and would have continued doing what you were doing prior to entering into the arrangement. The above analysis of the revenue and capital receipts expected over the life of the arrangement clearly shows that the arrangement is not commercially or economically viable without the tax benefits and when framed with the professional investment advice provided to you, it makes no sense that a reasonable person would have entered this arrangement at all. 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. If you had not carried out the scheme, it is reasonable to expect that you would not have incurred any interest on the investment line of credit and so would not have been entitled to any deductions in respect of interest incurred on it. Accordingly, the relevant tax benefit you obtained in connection with the scheme under paragraph 177(1)(b) is the allowable deduction for the interest incurred on the investment line of credit in each of the relevant income years. | Detailed Reasoning - Dominant purpose: A key question, for Part IVA purposes, is whether you entered into or carried out the scheme, or part of the scheme for the dominant purpose of obtaining a tax benefit in connection with the scheme. This requires the drawing of a conclusion about the objective purpose for undertaking the scheme by reference to the eight objective factors identified in paragraph 177D(b). The conclusion to be reached is the conclusion of a reasonable person. An objective purpose of a taxpayer of 'paying their home loan off sooner' or similar, does not prevent Part IVA from applying to this type of arrangement. As was noted in the joint judgment of the High Court in FC of T v. Spotless Services Ltd & Anor (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 FC of T v. Hart [2006] 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 FC of T v. Hart [2006] 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 you achieve your objective of 'paying your home loan off sooner' and your other personal goals set out above may attract the operation of Part IVA. In the context of applying the eight factors in paragraph 177D(b) to this scheme, the following observations are made: The scheme involves you using the investment line of credit to fund the acquisition of your investments and allow the interest incurred on this line of credit to capitalise without repayment, whilst depositing all your income (including dividend/investment income salary and wages into your private line of credit. Further, you will not make any repayments on the investment line of credit until after you have paid off your home loan. Interest on the investment line of credit will thereby be capitalised. The effect is the deferral of the payment of your investment line of credit interest in order to enable you to repay an equivalent amount on your home loan. The manner in which the scheme in question is entered into or carried out is explicable only by the taxation consequences. Apart from the purported availability of additional tax deductions, it makes no financial sense for you to, in effect, fund repayments on your home loan using the investment line of credit. Apart from the purportedly available additional tax deductions, your financial position under the scheme is worse, than it would be compared with what you would reasonably be expected to have done if you had not carried out the scheme. Indeed the scheme is not commercially or economically viable without the tax benefits it purports to provide. The effect and substance of the scheme is that the borrowings under the investment line of credit are financing additional repayments on your non-deductible home loan that you would otherwise not be able to make. The total interest deductions available to you under the scheme are greater than the deductions you might reasonably be expected to be entitled to if you hadn't entered into the scheme. That is, if you hadn't entered into the scheme, you would not have incurred any interest on the line of credit. The availability of these additional tax deductions for interest under the scheme will significantly reduce the income tax payable by you in each of the relevant income years. You entered the arrangement at a time where you were seeking to fund a substantial amount of private expenditure, including paying off your home loan, home renovations and travel discussed above and you will terminate the arrangement prior to it producing more assessable income than the deductions you will incur to get it. Accordingly, it is open for a reasonable person to conclude (and the Commissioner is satisfied) that you entered into or carried out the scheme, or part of the scheme, for the dominant purpose of enabling you to obtain a tax benefit in connection with the scheme. | Detailed Reasoning - Conclusion on the application of Part IVA: You have obtained a tax benefit in connection with a scheme to which Part IVA applies. The Commissioner is entitled to, and would, make a determination under paragraph 177F(1)(b) that the whole of the deduction for the interest incurred on the investment line of credit shall not be allowable to you in each of the relevant income years.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet . | No. However the interest expenses are included in calculating the net income or loss of the tax law partnership, but not exceeding the amount of assessable income derived by the partnership in that income year, as described in the reasons for decision. | 2. Will the Commissioner exercise his discretion under Section 177F of the Income Tax Assessment Act 1936 (ITAA 1936) to deny a deduction for any part of the interest incurred on the investment line of credit? | The Commissioner declines to rule on this issue. As you (or your tax law partnership) are not entitled to a deduction, Part IVA has no application. | 3. Will the Commissioner deny a deduction for any part of the interest incurred on the investment line of credit under any other provision of the ITAA 1997 or ITAA 1936?