Relax, the High Court hasn't given the Tax Office carte blanche against negative gearing.
What's more, the Tax Office doesn't think so either. But in the recent Hart decision, the judges killed off Austral Mortgage's wealth optimiser or split loan.
Despite the ruling that interest on interest wasn't tax deductible, the Tax Office doesn't appear to be taking advantage of the broad brush provision against tax avoidance that it can call upon when all else fails.
Austral offered a mortgage split between a housing loan and an investment loan. Because it let borrowers initially direct all their repayments to the housing loan, the tax deductible investment loan went unpaid and ticked up more interest.
So the tax deductions got bigger each year as the interest accumulated, a saving that helped pay off the housing loan faster.
Suggestions that the ruling meant the Tax Office would no longer allow interest on interest as a tax deduction, or even negative gearing itself, have been exaggerated. The Tax Office said the problem was in claiming "a greater tax deduction for interest on the investment component of the loan than would be the case with conventional loans".
In other words, there's nothing wrong with claiming interest on an investment loan. It's rearranging your finances so you can claim even more interest that was the problem.
Further, the ruling "only applies to interest deductions under a split or linked loan facility".
The Tax Office has revealed that taxpayers who received a private binding ruling on the Austral loan before June 24, 1998 can still claim the capitalised interest. But those who have been claiming all the interest on the investment loan and voluntarily file an amendment will face a reduced penalty of 5 per cent of the tax shortfall.
Austral Mortgage said it would no longer offer the loan, but existing borrowers did not have to unwind their mortgages.
