FLASH: High Court stops split-loan tax lurk

The High Court has ruled that split-purpose or “linked” property loans, which effectively enabled borrowers to make financing their own home tax deductible, amount to tax avoidance schemes. The result means lucrative tax deductions claimed on such loan arrangements will not be permitted. Split loans have been under a cloud in a long-running legal case between the Australian Taxation Office and a Canberra couple, the Harts. In the Hart case, the High Court has agreed with the ATO that the “wealth optimiser” loan provided to the couple by Austral Mortgage was a tax-avoidance scheme. The strategy saw one loan divided into two accounts for two separate properties – the borrower’s own home and an investment property. The idea was to direct all repayments to the home loan account, on which interest is not tax deductible, while letting interest build up on the investment property account – interest which is tax deductible. Although the outstanding loan amount increases for the investment property as interest gets capitalised on top of the original amount borrowed, this was to be offset by higher tax deductions. The Harts increased potential total tax deductions by $170,000 using the wealth optimiser loan structure. Austral wrote more than $100 million of the loans before the ATO stepped in and rejected them in 1997. Many lenders were waiting for the outcome and were planning to launch similar products.