Home and Investment Finance for NTAA Members @ 7.35%

Line of Credit Facility for NTAA Members @ 7.45%

Our current Home and Investment loan offer, exclusive to NTAA Members and their staff, is a very simple loan with Internet and Phone Banking, No Monthly or Annual Fees, No additional Application Fess (Includes Valuation and Solicitor costs) and is flexible including up to four Loan Splits. Enquire with Moises Hernandez or Gina Amato on 1800 700 666.

Our loans have a Comparison Rate (the rate which includes all of the fees and charges and denotes the real costs to the borrower) of 7.38% for the Standard Variable loan and 7.48% for the Line of Credit facility based on a $200,000 loan over 30 years.

Capitalising Interest Payments
You or your clients can structure your home and investment loans under a line of credit facility split into 2 sub-accounts as outlined in the recently published ATO Interpretative Decision 2006/298.

The ATO Interpretative Decision 2006/298 (ATOID 2006/298) is an Interpretative Decision concerning the deductibility of compounding and capitalising interest on a line of credit facility. ATOID 2006/298 confirms that the taxpayer is entitled to a deduction under section 8-1 of the ITAA 1997 for compound interest incurred on funds borrowed, under a line of credit facility, to acquire an income producing asset.

The facts on which the ATO’s decision is based are as follows: (Extract from ATOID 2006/298)

“The taxpayer took out a line of credit facility, with a financial institution, which was divided into two sub-accounts. One sub-account was used to acquire an income producing asset (investment subaccount) and the other sub-account was used for non-income producing purposes (private sub-account).
There were no fixed minimum principal and interest repayments required by the lender. The taxpayer made no payments off the investment sub-account until the private subaccount had been repaid in full. As interest was capitalised on the investment sub-account, compound interest, being interest on the capitalised interest, accrued on the investment sub-account.”

The Interpretative Decision makes reference to the Hart Case which related to the Wealth Optimiser and its launch in 1996. In that case the High Court held that the Wealth Optimiser home and investment loan facility was caught by Part IVA tax avoidance provisions in that it was the “wealth optimising aspect of the structure that constituted the scheme” and “secured the tax benefit”.
The fundamental difference between Wealth Optimiser’s loan structure and the facts as outlined in the ATO’s Interpretative Decision 2006/298 is that under Wealth Optimiser the lender would accept capitalisation of interest on the investment account - only on the basis that it received another predetermined minimum principal and interest amount in reduction of the home loan account. 

Lenders have been seeking clarification on the treatment of capitalised or compounding interest on home and investment line of credit facilities and this Interpretative Decision from the ATO provides clarity to investors about the deductibility of the capitalised interest on a line of credit facility where no fixed minimum principal and interest repayments are required by the lender.”

InterPrac's Line of Credit is tailored to ATOID 2006/298 in that its features allow for:

1. A line of credit facility divided into two sub-accounts.

2. One sub-account is used for the acquisition of an income producing asset (investment sub-account) and the other sub-account is used for non-income producing purposed (private sub-account)

3. There are no fixed minimum principal and interest repayments required by the lender – provided of course, that the taxpayer in capitalising interest does not exceed his line of credit limit. This proviso simply ensures that the amount drawn under both lines of credit at no time exceeds the loan amount, being that assessed and approved by the lender as being within its loan to value and servicing capacity guidelines.

4. The taxpayer can choose to make no payments off the investment sub-account until the private home loan sub-account had been repaid in full.

5. The taxpayer can choose to capitalise interest on the investment sub-account thereby accruing additional compound interest (being interest on the capitalised interest) on the investment sub-account.

ATOID 2006/298 clearly states that in this situation the Taxpayer is entitled to a deduction under section 8-1 of the ITAA 1997 for the capitalising and compound interest incurred on the investment sub-account.

An additional benefit of InterPrac's Line of Credit is the ability it gives borrowers to draw down surplus funds from either account without the need for balance transfers or changing credit limits on either account.

The ATOID makes reference to Part IVA as follows: “Note: While the general anti avoidance provisions of Part IVA of the Income Tax Assessment Act 1936 are not considered applicable in this case, the application of Part IVA depends on a detailed analysis of the facts of each case. The Commissioner considers that a scheme in relation to a loan facility would need to have the same features as those set out in paragraphs 16 to 19 in Taxation Ruling TR 98/22 before Part IVA could be applied. "Our bold)

InterPrac's Line of Credit does not have “the same features” as those outlined in TR98/22, Para 16 -19. These paragraphs are noted below and refer to the “Identification of the scheme” Para 16 of the TR98/22 states that the scheme may vary from case to case, but the scheme “always” includes

• “entering into a facility with one lender.” InterPrac's Line of Credit is with entered into with one lender but we note that ATOID 2006/298 specifically refers to a taxpayer “taking out a line of credit facility with a financial institution”.

• “acceptance by the lender of capitalisation of interest on the investment account on the basis that the lender receives another predetermined amount.” The Lender of a InterPrac's Line of Credit loan accepts capitalisation of interest on the investment line of credit account without the requirement that another predetermined amount be received.

• “application of any payments to the private account (until the private account is repaid) including those that would otherwise have been paid against the investment account” Under InterPrac's Line of Credit there is no requirement to make an application of payments to the private account that includes those that would otherwise have been paid against the investment line of credit account. Interest can capitalise on the investment line of credit account without any additional payment being made to the private home loan account or any other account. 

• “consequential incurring of an amount of interest (by reason of the process of capitalising interest) on the investment account.” InterPrac's Line of Credit does allow for the capitalisation of interest on the investment line of credit account which does create additional deductible interest. ATOID 2006/298 specifically states that provided the facts are as outlined in their decision this additional or compound interest is deductible.

• “an understanding or agreement as to how the facility is to operate, including the linking of the private account and investment accounts” There is no agreement or understanding between the parties as to how the arrangement is to operate. The borrower alone determines how he will utilise the features of a InterPrac's Line of Credit facility. InterPrac's Line of Credit does not link the private line of credit account and the investment line of credit account. The private line of credit account and the investment line of credit account operate independently of each other.
As no payment is required on the capitalising investment line of credit account the borrower has a cash flow “benefit”. The borrower can utilise that cash flow benefit as he/she sees fit – be it to pay off the home loan more quickly, save for a holiday, or make further investments.

• “the overall indebtedness not exceeding the loan amount” As with any borrowing a customer’s overall indebtedness must not exceed the total amount approved and borrowed otherwise the loan would be in default. The lender determines the loan amount in accordance with general lending principles – this will be limited by the borrower’s capacity to service the loan and the value of the property offered as security. The borrower is only able to capitalise interest if in doing so, he/she does not exceed the total amount borrowed.
InterPrac's Line of Credit’s features do not fall within the “must haves” parameters utilised in TR98/22 Para 16 for the “identification of a scheme. 

Para 17 states “The scheme may also include some or all of the following:

• “the refinancing of an existing private loan agreement or the advancing of funds for a private loan”

• refinancing of an existing business or investment loan or the advancing of funds for a business or investment loan

• securing both loans or accounts by the same assets

• often the charging of additional fees and interest”

Para 18 states “While some of the features listed in Para 17 above may be common to other loan arrangements, when combined with the features listed in Paragraph 16 above, they make a scheme to which Part IVA may apply”

While InterPrac's Line of Credit loan obviously involves the purchase / refinance of home and investment property/loans as outlined in Para 17, it does not have all the features of a scheme as identified in Para 16 and as such, in my view, the provisions of Part IVA do not apply to this new product.

Para 19 “The scheme involves the taking of steps to increase the tax deduction available on the investment account by means of a corresponding reduction of principal and, therefore interest on the private account through a pre-ordained course of conduct. This course of conduct includes the redirecting of payments made on the total debt outstanding under the facility to the private account while allowing interest to capitalise on the investment account.

There is no pre-ordained course of conduct with InterPrac's Line of Credit loan – the taxpayer may or may not choose to capitalise interest on the investment sub-account, he may or may not choose to apply additional payments to the home loan subaccount.

There is nothing within InterPrac's Line of Credit structure that drives any tax benefit – rather the taxpayer determines how he will apply his/her earnings. Unlike Wealth Optimiser there is no “distinctive character” about InterPrac's Line of Credit facility that could be deemed to constitute a scheme.

If a taxpayer takes out a InterPrac's Line of Credit loan and is disciplined, he /she is able to pay of his/her home loan more quickly and at the same time enjoy additional negative gearing tax benefits.

The ATOID2006/298 should result in a boost in the level of investment in property and shares, particularly in the over 35s, as it enables these taxpayers to better position themselves for a debt-free retirement.

If you think we could be of assistance to your client or clients contact us on 1800 700 666.

Yours Sincerely

Brent Jones

General Manager