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Abstract

The Full High Court in FCT v Hart (2004) 55 ATR 712 found that further interest and compound interest incurred under a split loan facility is not deductible under the general deduction provision, by operation of the general anti‐avoidance rule (GAAR)in Part IVA. But can the interest be included in the cost base of a CGT asset, namely, the investment property? In Taxation Determination TD 2005/33, the Australian Taxation Office (ATO) says no. The ATO claims that it would be inappropriate for the ATO to make a compensating adjustment under s 177F(3) to include the interest denied deductibility because of the GAAR in the cost base of the investment property.
This article argues there are many shortcomings in the ATO’s technical analysis in TD 2005/33. The ATO’s approach is illogical, and much of the focus in TD 2005/33 is on the wrong question. The design of the GAAR is likely to provide an answer unpalatable to the ATO. The failure of the ATO to raise another relevant GAAR argument (ie, taxpayer obtained a tax benefit in the form of an inclusion in the cost base of the investment property) in Hart’s case does not assist the ATO. Further, the ATO’s extraordinary failure to refer to Taxation Ruling TR 98/22 in TD 2005/33 borders on deception. Taxation Ruling TR 98/22 ‐ a binding ruling ‐ states that certain interest (further interest, and arguably compound interest) denied deductibility under a split loan arrangement because of a GAAR determination is included in the cost base of the investment property. This is contrary to the position now asserted by the ATO in TD 2005/33. Is TD 2005/33 being used to ‘bludgeon’ affected taxpayers into accepting a position that has little merit under the tax law?

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