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Tax Commissioner's split loans crackdown backfires

Publication date: 07 Aug 97 | Source: THE TAX INSTITUTE

Tax Commissioner's split loans crackdown backfires

The recent draft Ruling (TR 97/D7) issued by the Commissioner of Taxation, to apply the general anti-avoidance provisions (Part IVA) to additional interest generated from split or linked loans, will not generate the revenue expected.

The Taxation Institute of Australia President, Mr Richard Gelski said the ruling had failed to achieve the Commissioner's objective of increasing revenue from these loan arrangements and further highlights that a piecemeal approach to correcting problems in Australia's tax system is unsustainable.

"This draft Ruling has completely backfired on the Tax Commissioner," Mr Gelski said.

"Firstly, if you look at the ruling in isolation, the estimated revenue from applying Part IVA to existing split loans is highly inflated because it is calculated on the assumption that each loan will run to its full term. However, most mortgages run for an average period of five to seven years, not their full term as assumed by the Commissioner," he said.

"This means that the so-called 'tax savings' quoted in the draft Ruling are vastly overstated and thus the estimated revenue generating potential of the draft Ruling is questionable."

For example, the Ruling sets out a hypothetical situation where a home owner uses the equity in their home to invest in an investment property. The Ruling proceeds on the basis that the loan will run to its full term of 25 years thus generating over $46,400 in tax savings. However, as the average investment property loan runs only a quarter of that, tax savings will be more likely to be around $10,000 or $2000 per year.

"Second, it is a gross overstatement for the Commissioner to assert that the general anti avoidance provisions of Part IVA, which, as the then Treasurer Mr John Howard stated, were introduced to deal with blatant, artificial and contrived schemes, will apply to the majority of split loan or linked loan products," Mr Gelski said.

This result suggests that the Commissioner has not thought through the full consequences of the draft Ruling and his objective to increase revenue has backfired," he said.