ATO warns on home loan tax avoidance schemes

Mortgage holders have been warned of two illegal tax avoidance schemes being offered by unscrupulous promoters that could result in tax deductions being cancelled and penalties being imposed.

The home loan schemes are included in examples that form part of the ATO’s new guide 'Investigating tax-effective arrangements', which aims to help borrowers “recognise some of the common types of tax avoidance schemes so you can reject them and avoid the negative consequences associated with them”.

The ATO warns of a tax avoidance scheme being promoted as a 'mortgage management' plan, which involves refinancing your home loan.

“In this arrangement, a tax scheme promoter offers you a means of creating deductible interest payments, equivalent to your home loan interest payments, using the existing equity in your home to obtain additional loans for the purpose of claiming investment deductions.

“This is a scheme because there is no real investment and the dominant purpose of the arrangement is to reduce your assessable income by claiming deductions you are not entitled to,” says the ATO, which warns of “significant commercial risks if you enter into these types of arrangements”.

“Shares in the promoter company may not deliver a reasonable return or be worth far less than you anticipate," says the ATO.

The second property-related tax avoidance scheme is a ‘home loan unit trust arrangement’.

“In this arrangement, a promoter claims they can make your home loan interest payments tax deductible.

"Using a unit trust the scheme promoter sets you up to borrow funds to purchase a property. You then live in the property and pay rent to the unit trust at market rates which the trust declares as taxable income.

“The trust claims associated expenses and interest charges as deductions against the rental income and you claim a tax deduction for the interest payments on the borrowing.

“This is a scheme because it involves getting a tax benefit from borrowings for private expenses - your home.

“You would not be entitled to claim the interest payments as deductions and you risk having to pay penalties and interest,” says the ATO.

The ATO warns: “When we identify arrangements where the promised tax benefit isn't available under the law, the arrangement is deemed to be a tax avoidance scheme. As a result, tax deductions for the arrangement are disallowed and participants face potential penalties.

“Tax schemes aren't limited to the 'too good to be true' type of arrangement. They can be more sophisticated than many people realise. Schemes can be complex arrangements that are offered to you by some advisers with claims the availability of tax benefits is confirmed by genuine experts."

The ATO is also warning investors about illegal SMSF rental property scheme.

The guide can be read online or downloaded as a PDF document.