Debt-recycling via LOC a tax-avoidance strategy?

Just filling time on another exciting day in lock down, I decided to read the ATO taxation rules for rental properties.

came across this.....

More complicated investment loan interest payment arrangements also exist, such as ‘linked’ or ‘split’ loans which involve two or more loans or sub-accounts in which one is used for private purposes and the other for business purposes. Repayments are allocated to the private account and the unpaid interest on the business account is capitalised. This is designed to allow you to pay off your home loan faster while deferring payments on your rental property loan and maximises your potential interest deduction by creating interest on interest.

and read the corresponding Taxation Determination TD 2012/1....

which says.... 'It is often said that taxpayers who enter into an investment loan interest payment arrangement do so for the purpose of 'paying their home loan off sooner' or 'owning their own home sooner'. (making it sound like they accept this as a strategy at least sometimes) but then goes on to list many reasons why it might be considered a tax-avoidance strategy.

I've come across mention of using LOC and similar strategies to pay off home loans quicker / recycle debt. Are they generally seen as legitimate by the ATO?

 

TD 2012/1 refers to capitalising interest. There were schemes where people borrowed to pay the interest on investment loans while using rent and other income to pay off the main residence loan.

This is allowable under s8-1 but the ATO can deny the extra deductions if it is a scheme with a dominant purpose of gaining a tax advantage.

 

thanks for clarifying Terry! Much appreciated

 

Was this tested in Hart’s case?

 

Sort of, but very different.
Hart's involved a product marketed where the investment portion was left to capitalise and all repayments went off the non-deductible portion.