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Sledgehammer approach on split loans absurd

Publication date: 28 May 97 | Source: THE TAX INSTITUTE

It is absurd to suggest that the general anti-avoidance provision - Part IVA -should be applied to persecute ordinary taxpayers who merely seek to ensure that interest on business loans is properly tax deductible, according to Taxation Institute of Australia President, Mr Richard Gelski.

"Part IVA was introduced by the then Treasurer and now Prime Minister, Mr Howard, to deal with blatant, artificial and contrived tax avoidance schemes*," Mr Gelski said.

"It has never been touted by Government as an appropriate weapon to be used against ordinary taxpayers carrying on their ordinary business affairs."

"A split loan arrangement is no more than a recognition of the fact that interest on moneys borrowed for business purposes on the one hand is tax deductible, and interest on moneys borrowed for private purposes is not. Choosing to pay off the private purpose loan first is hardly tax avoidance" he said.

The High Court in the recent Spotless decision, although far reaching in its effects, was careful to ensure that Part IVA should not be applied to common place transactions recognised and allowed by the Tax Act.

"Moving to apply Part IVA to deny deductions for legitimate business loans, is akin to applying Part IVA to taxpayers who wish take advantage of the Government's new savings rebate!" Mr Gelski said.

"If there are dodgy practices built into some split loans then deal with those. Don't throw the baby out with the bathwater."

"The Commissioner of Taxation ought to be focusing on more pressing issues such as dealing with the black economy rather than targeting ordinary taxpayers who are trying to do the right thing," he said.

The announcement by the Commissioner is starkly at odds with previous rulings, which recognise common place personal finance arrangements for what they are - sensible financial management. For example, the ATO has accepted interest offset accounts in Taxation Ruling TR 93/6, and the use of a company as an investment vehicle, see Tax Determination TD 95/4.

"Assurrances were given by the Government that Part IVA's undoubted broad reach would not be used to attack ordinary family or business arrangements. Clearly this is not the case in practice."

* Attachment

In a recent Federal Court decision, WD & HO Wills (Australia) Pty Ltd v FCT (1996) 32 ATR 168 Mr Justice Sackville said:

"The Second Reading Speech, delivered by the then Treasurer, articulates the policy said to underlie Part IVA:

The proposed provisions ... seek to give effect to a policy that such measures ought to strike down blatant, artificial or contrived arrangements, but not cast unnecessary inhibitions on normal commercial transactions by which taxpayers legitimately take advantage of opportunities available for the arrangement of their affairs....

In order to confine the scope of the proposed provisions to schemes of the blatant or paper variety, the measures in this Bill are expressed so as to render ineffective a scheme whereby a tax benefit is obtained and an objective examination, having regard to the scheme itself and to its surrounding circumstances and practical results, leads to the conclusion that the scheme was entered into for the sole or dominant purpose of obtaining a tax benefit."

Hansard, HR, 27 May 1981, 2683 (The Hon J. Howard)."