Taxation Determination TD 2012/1
Date of effect: 7 March 2012

What this ruling is about: This publication (excluding appendixes) is a public ruling for the purposes of the Taxation Administration Act 1953. A public ruling is an expression of the Commissioner's opinion about the way in which a relevant provision applies, or would apply, to entities generally or to a class of entities in relation to a particular scheme or a class of schemes. If you rely on this ruling, the Commissioner must apply the law to you in the way set out in the ruling (unless the Commissioner is satisfied that the ruling is incorrect and disadvantages you, in which case the law may be applied to you in a way that is more favourable for you - provided the Commissioner is not prevented from doing so by a time limit imposed by the law). You will be protected from having to pay any underpaid tax, penalty or interest in respect of the matters covered by this ruling if it turns out that it does not correctly state how the relevant provision applies to you. Ruling 1. Yes, provided that the interest is otherwise an allowable deduction. In the context of Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) [1] a taxpayer's purpose of 'paying their home loan off sooner' or 'owning their own home sooner' does not prevent the application of section 177F to an 'investment loan interest payment arrangement' of the type described in paragraph 3 of this Determination. Date of effect 2. This Determination applies to years of income commencing both before and after its date of issue. However, this Determination will not apply to taxpayers to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of issue of this Determination (see paragraphs 75 to 76 of Taxation Ruling TR 2006/10). Commissioner of Taxation 7 March 2012

Class of entities or scheme: 3. While investment loan interest payment arrangements may vary in the precise loan and security details, they all have similar financial and purported tax effects. An investment loan interest payment arrangement will exhibit all or a significant number of the features set out as follows: 4. It is often said that taxpayers who enter into an investment loan interest payment arrangement do so for the purpose of 'paying their home loan off sooner' or 'owning their own home sooner'. 5. Taxpayers who have entered into an investment loan interest payment arrangement may be entitled to deductions for the interest incurred on the line of credit under section 8-1 of the Income Tax Assessment Act 1997 . | Can Part IVA apply?: 6. Part IVA is a general anti-avoidance rule. Part IVA gives the Commissioner the power 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. 7. In broad terms, Part IVA will apply where the following requirements are satisfied: 8. The application of Part IVA depends on a careful weighing of all the relevant facts and surrounding circumstances of each case. Therefore, in the absence of all relevant information it is not possible to state definitively whether a particular arrangement or transaction will attract Part IVA. However, an investment loan interest payment arrangement of the type described in paragraph 3 is capable of attracting the operation of Part IVA. 9. The precise description of the scheme for the purposes of Part IVA will depend on the facts of the particular case. However, in the context of considering whether Part IVA applies to an investment loan interest payment arrangement the scheme would normally include some or all of the elements described in paragraph 3 of this Determination. 10. In relation to this type of scheme it might reasonably be expected that if the scheme had not been entered into or carried out, the taxpayer(s) would have met the interest payments on the investment loan out of their own cash flow rather than use the line of credit. Thus, the taxpayer(s) would not have incurred any interest, or would have incurred less interest, on the line of credit. Consequently, the taxpayer(s) would not have been entitled to any deductions in respect of any such interest or would have been entitled to a smaller deduction. Accordingly, the relevant tax benefit obtained by the taxpayer(s) in connection with the scheme under paragraph 177C(1)(b) is (or includes) either: 11. A key question, for Part IVA purposes, is whether the identified scheme was entered into or carried out by a person for the dominant purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme. 12. 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. [4] The provision does not require, or even permit, any inquiry into the subjective purpose or motive of the relevant taxpayers or others who entered into or carried out the scheme. [5] 13. Further, an objective purpose of the taxpayer(s) of 'paying their home loan off sooner' does not prevent Part IVA from applying to an investment loan interest payment arrangement. As was noted in the joint judgment of the High Court in Spotless : [6] 14. Further, Gleeson CJ and McHugh J of the High Court noted in Hart [7] that: 15. Callinan J in Hart [8] similarly distinguished between objectives that are 'entirely irreproachable and proper' and the 'means adopted to achieve these results'. 16. Therefore, the means by which the taxpayer(s) achieve their objective of 'paying their home loan off sooner' may result in the requirements of Part IVA being satisfied. 17. In the context of applying paragraph 177D(b) to an investment loan interest payment arrangement the following general observations can be made: 18. Accordingly, it would be open for a reasonable person to conclude, having regard to the matters in paragraph 177D(b), that one or more of the parties that entered into or carried out the scheme did so for the dominant purpose of enabling the taxpayer(s) to obtain a tax benefit in connection with the scheme. If a reasonable person would reach such a conclusion then Part IVA applies to the scheme and the Commissioner would be entitled to cancel under paragraph 177F(1)(b) the tax benefit. That is, the relevant interest incurred on the line of credit would not be deductible to the taxpayer(s). Previously released in draft form as TD 2011/D8



Appendix: Investment loan interest payment arrangements: 3. While investment loan interest payment arrangements may vary in the precise loan and security details, they all have similar financial and purported tax effects. An investment loan interest payment arrangement will exhibit all or a significant number of the features set out as follows: 4. It is often said that taxpayers who enter into an investment loan interest payment arrangement do so for the purpose of 'paying their home loan off sooner' or 'owning their own home sooner'. 5. Taxpayers who have entered into an investment loan interest payment arrangement may be entitled to deductions for the interest incurred on the line of credit under section 8-1 of the Income Tax Assessment Act 1997 . | Can Part IVA apply?: 6. Part IVA is a general anti-avoidance rule. Part IVA gives the Commissioner the power 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. 7. In broad terms, Part IVA will apply where the following requirements are satisfied: 8. The application of Part IVA depends on a careful weighing of all the relevant facts and surrounding circumstances of each case. Therefore, in the absence of all relevant information it is not possible to state definitively whether a particular arrangement or transaction will attract Part IVA. However, an investment loan interest payment arrangement of the type described in paragraph 3 is capable of attracting the operation of Part IVA. 9. The precise description of the scheme for the purposes of Part IVA will depend on the facts of the particular case. However, in the context of considering whether Part IVA applies to an investment loan interest payment arrangement the scheme would normally include some or all of the elements described in paragraph 3 of this Determination. 10. In relation to this type of scheme it might reasonably be expected that if the scheme had not been entered into or carried out, the taxpayer(s) would have met the interest payments on the investment loan out of their own cash flow rather than use the line of credit. Thus, the taxpayer(s) would not have incurred any interest, or would have incurred less interest, on the line of credit. Consequently, the taxpayer(s) would not have been entitled to any deductions in respect of any such interest or would have been entitled to a smaller deduction. Accordingly, the relevant tax benefit obtained by the taxpayer(s) in connection with the scheme under paragraph 177C(1)(b) is (or includes) either: 11. A key question, for Part IVA purposes, is whether the identified scheme was entered into or carried out by a person for the dominant purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme. 12. 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. [4] The provision does not require, or even permit, any inquiry into the subjective purpose or motive of the relevant taxpayers or others who entered into or carried out the scheme. [5] 13. Further, an objective purpose of the taxpayer(s) of 'paying their home loan off sooner' does not prevent Part IVA from applying to an investment loan interest payment arrangement. As was noted in the joint judgment of the High Court in Spotless : [6] 14. Further, Gleeson CJ and McHugh J of the High Court noted in Hart [7] that: 15. Callinan J in Hart [8] similarly distinguished between objectives that are 'entirely irreproachable and proper' and the 'means adopted to achieve these results'. 16. Therefore, the means by which the taxpayer(s) achieve their objective of 'paying their home loan off sooner' may result in the requirements of Part IVA being satisfied. 17. In the context of applying paragraph 177D(b) to an investment loan interest payment arrangement the following general observations can be made: 18. Accordingly, it would be open for a reasonable person to conclude, having regard to the matters in paragraph 177D(b), that one or more of the parties that entered into or carried out the scheme did so for the dominant purpose of enabling the taxpayer(s) to obtain a tax benefit in connection with the scheme. If a reasonable person would reach such a conclusion then Part IVA applies to the scheme and the Commissioner would be entitled to cancel under paragraph 177F(1)(b) the tax benefit. That is, the relevant interest incurred on the line of credit would not be deductible to the taxpayer(s). Previously released in draft form as TD 2011/D8


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. | ...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.


Related rulings: TR 93/6 TR 2006/10
Legislative references: ITAA 1936 ITAA 1936 Pt IVA ITAA 1936 177A ITAA 1936 177C ITAA 1936 177C(1)(b) ITAA 1936 177D ITAA 1936 177D(b) ITAA 1936 177F ITAA 1936 177F(1)(b) ITAA 1997 8-1
Case references: FC of T v. Hart & Anor [2004] HCA 26 2004 ATC 4599 (2004) 55 ATR 712
Subject references: borrowings & loans cancellation of tax benefits deductions & expenses expenses of borrowing interest expenses Part IVA rental property loan interest expenses schemes & shams tax benefits under tax avoidance schemes tax planning, avoidance & evasion