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Brokers that recommend split loans that combine home and investment properties could be placing their clients at risk if they don’t adhere to 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.
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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’ that 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 The Adviser that since the ruling was handed down, borrowers have started to use this type of loan structure once again.
Ms Montgomery said any broker recommending this loan structure or 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.”
But, according to Ms Montgomery, it is not just borrowers who are in danger. Brokers that offer this particular loan structure could also find themselves in hot water.
“If the ATO decides they are going to challenge this structure, that could be an issue for the broker or lender,” she said.
“Brokers especially could be seen to offer advice that is outside of their expertise – which is tax advice.”
