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Investors who use split loans that combine home and investment properties could be breaching the Australian Taxation Office ruling around tax avoidance.
Split property loans - not to be confused with split rate loans - were popular in the late 1990s.
They allowed home owners to divert all cash inflows to the home loan or an offset account, while using a credit facility to pay interest on an investment loan, effectively ‘capitalising’ the interest.
These loans were later quashed in 2004 when the Tax Office finally won a landmark case in the High Court.
However, Resi’s chief executive officer Lisa Montgomery told Smart Property Investment that since the ruling was handed down, borrowers have started to use this type of loan structure once again.
Ms Montgomery said any borrower with this loan structure should be “careful” as there could be significant negative repercussions.
“There is huge danger for the borrower that takes out this structure,” she said.
“Let’s not forget that the debt is capitalising. If you are going to be using this structure and the Australian Taxation Office challenges it, you could end up with a debt that is greater than the property you just purchased.
“Moreover, if the ATO challenges the loan structure, the borrower will be forced to pay back any tax deductions they have claimed in the past as well as the capitalised debt they have incurred.”