WARNING: Early Home Mortgage Repayment Schemes

Caution should be exercised in setting up a loan arrangement which involves channeling all funds into the home loan whilst allowing the interest on the investment loan to capitalise. This was raised in the 2004 Hart Case and further clarified in TD 2012/1.

http://law.ato.gov.au/atolaw/view.htm?docid=%22TXD%2FTD20121%2FNAT%2FATO%2F00001%22

In the initial case the individual simply had 2 loans – a home loan and an investment loan. They also had an investment property and a home. The client channeled all rent and other income towards the home loan allowing the interest on the investment loan to capitalise. The result was the home loan was repaid more quickly than usual with the investment loan larger than what it was when it was initially taken out.

The benefit was non-deductible debt was reduced and deductible debt increased. The ATO have stated that this is tax avoidance and that as a minimum the annual interest on the investment loan must be paid each year.