Taxation Determination TD 2012/1
This determination states that Pt IVA can apply to deny a deduction for some, or all, of the interest expense incurred in respect of an “investment loan interest payment arrangement” of the type described in this determination. The determination was previously released as Draft TD 2011/D8 and is essentially unchanged from the draft.
Arrangement
The kinds of investment loan interest payment arrangements that the determination is concerned with have features such as:
- The taxpayer owns at least two properties: one property is the taxpayer’s residence and the other is used to derive rent.
- The taxpayer has an outstanding loan which was used to acquire the residence, an outstanding loan which was used to acquire the investment property and a line of credit or similar borrowing facility with an approved limit.
- The respective interest rates on the home loan and investment loan are typically at or about the same rate. The interest rate on the line of credit is typically (but not always) higher by a small margin (for example, 0.15 per cent).
- The investment loan is typically an interest-only loan for a specified period with principal and interest repayments required thereafter, or the interest-only period may be extendable.
- The line of credit typically has no minimum monthly repayment obligations provided the balance remains below the approved limit.
- The home loan, investment loan and the line of credit are each secured against the taxpayer’s residence and/or investment property.
- The line of credit is drawn down to pay the interest on the investment loan as it falls due. Where no repayments are required on the line of credit, the taxpayer does not make any repayments, which results in interest on the line of credit being capitalised and compounded. Where monthly interest repayments are required on the line of credit, the taxpayer meets such repayments from their cash flows.
- Typically, all the taxpayer’s cash inflows (including that which the taxpayer otherwise might reasonably be expected to use to pay the interest on the investment loan) are deposited into their home loan or an “acceptable loan account offset account”, which has the effect of reducing the interest otherwise payable on the home loan.
- If the line of credit reaches its approved limit before the home loan has been repaid, the taxpayer may apply to increase the limit on the line of credit in conjunction with a corresponding decrease in the available “redraw” amount in the home loan.
The ATO says a key feature of the arrangement is the use of the line of credit to pay the interest on the investment loan. This results in all or most of the interest on the investment loan, in effect, being capitalised. That is, the payment of the investment loan interest is deferred.
This deferral has the economic effect of allowing the taxpayer(s) to repay the home loan at a faster rate than would otherwise be possible: the taxpayer(s) are able to pay an amount equivalent to the deferred investment loan interest on the home loan.
Application of Pt IVA
In the context of applying para 177D(b) to an investment loan interest payment arrangement, the ATO observes that:
- The manner in which the scheme is entered into or carried out is generally explicable only by the taxation consequences. For instance, apart from the purported availability of additional tax deductions, the Tax Office considers it makes little (if any) financial sense for the taxpayer to, in effect, fund repayments on a home loan using a line of credit with a higher interest rate than the home loan.
- The total interest deductions purportedly available to the taxpayer under the scheme are greater than under the counterfactual.
- Apart from the purported availability of additional tax deductions, the taxpayer’s financial position under the scheme is generally no better (and possibly worse) than under the counterfactual.
- If the taxpayer’s residence is used as security for either the investment loan or the line of credit, the taxpayer will not actually own an unencumbered home any faster under the scheme than under the counterfactual.
- Where a single financial institution is involved, the financial institution’s financial position is substantially the same under the scheme and the counterfactual in terms of its total lending exposure and interest income earned across the three loan products.
In relation to this type of scheme, the ATO considers it might reasonably be expected that if the scheme had not been entered into or carried out, the taxpayer would have met the interest payments on the investment loan out of their own cash flow rather than use the line of credit (“counterfactual”).
The determination also says the relevant tax benefit obtained by the taxpayer in connection with the scheme is (or includes) any allowable deduction for such interest incurred on the line of credit.
The ATO considers it is open for a reasonable person to conclude, having regard to the matters in para 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 to obtain a tax benefit in connection with the scheme.
GST treatment of exit payments by retirement village residents
Draft GST Ruling GSTR 2012/D2
This draft ruling sets out the Commissioner’s views on the treatment of exit payments which a resident becomes liable to pay to the operator of a retirement village when the resident’s interest in the village terminates.
An exit payment is generally made by a resident of a retirement village to the village operator on exit from the village. Where an exit payment is made in connection with a supply, it is consideration for that supply.
If the operator does not provide services other than incidental services, the Tax Office will generally view the exit payment as consideration wholly for supplies that would be input taxed.
If the operator does provide non-incidental services, the Tax Office will also view the exit payment as relating to an input taxed supply if:
- the resident is liable to provide separate consideration for the non-incidental services, and
- the value of that consideration is not significantly less than the market value of the services.
However, the Tax Office will treat an exit payment as consideration wholly or partly for supplies that would be taxable where:
- the resident is not liable to provide any separate consideration for those services, or
- the value of the separate consideration they provide is significantly less than the market value of the services.
FBT rates, thresholds and other amounts for 2012/13
Taxation Determinations TD 2012/3-7
The Tax Office has released five determinations dealing with Fringe Benefits Tax (FBT) rates, thresholds, etc for the 2012/13 FBT year (ie, the FBT year that commenced on 1 April 2012).
- TD 2012/3: the record-keeping exemption threshold is $7642.
- TD 2012/4: the indexation factors for valuing non-remote housing are: New South Wales – 1.060; Victoria – 1.040; Queensland – 1.028; South Australia – 1.042; Western Australia – 1.035; Tasmania – 1.039; Australian Capital Territory – 1.056 and Northern Territory – 1.026.
- TD 2012/5: the following amounts represent a reasonable food component of a living away from home allowance (LAFHA) for expatriate employees: 1 adult – $250; 2 adults – $400; 3 adults – $450; 1 adult and 1 child – $325; 2 adults and 1 or 2 children – $450; 2 adults and 3 children – $524; 3 adults and 1 child – $524; 3 adults and 2 children – $599; 4 adults – $599.
For larger family groupings, add $150 for each additional adult and $75 for each additional child.
- TD 2012/6: the rates to be applied on a cents-per-km basis for calculating the taxable value of a fringe benefit arising from the private use of a motor vehicle other than a car are: 0-2500cc – 48 cents/km; over 2500cc – 57 cents/km; and motorcycles – 14 cents/km.
- TD 2012/7: the benchmark annual interest rate is 7.40 per cent.
