Tax Tip 78: Capitalising Interest and Claiming it off CGT?

Interest on interest is generally deductible if the interest on the underlying loan is deductible. But the ATO is empowered to deny the claiming of interest where it is a scheme with a dominant purpose of increasing tax deductions.

Borrowing from a LOC, or other loan, and then using this to pay the interest on an investment loan will not of itself be denied, but where it is done to increase deductions and shift debt from the non-deductible home loan to the deductible investment loan then it could be a scheme and therefore the interest denied.

But as interest is also deductible against CGT when the property is sold could you not claim the interest on interest now, but claim it on the eventual sale of the property?

It seems the ATO has already thought about this long ago. In
TD 2005/33 Income tax: does expenditure - which is a non-capital cost of ownership of a CGT asset - form part of the cost base of the asset, if it is a tax benefit in connection with a scheme to which the general anti-avoidance rules in Part IVA of the Income Tax Assessment Act 1936 apply?
https://www.ato.gov.au/law/view/document?docid=TXD/TD200533/NAT/ATO/00001

Where interest deductions are denied against income they will also be denied against CGT - para 11:

In calculating the amount of the net capital gain the disallowed interest does not form part of the cost base of the rental property for capital gains tax purposes unless the Commissioner makes a compensating adjustment to that effect.