ATO Ruling on Interest Capitalisation

After earlier releasing a draft ruling on interest capitalisation the ATO has finally released its ruling: TD 2012/1.

In property investing terms, interest capitalisation is where a person or entity is claiming interest costs on top of the original interest costs and instead of paying the original interest the borrower is paying down other non-deductable debt.

Under ATO regulations – Part IV A is the anti avoidance rule, which in very simple terms means that if your dominant reason for doing something financial is to avoid tax then this is illegal.  So you better have a very clear ’dominant purpose’ other than a tax benefit and following this ruling, it would be highly advisable to have a private ruling on this from the ATO, before you start claiming this additional tax benefit.

You might have very valid reasons as to why you are structuring your finances the way you are, and this could potentially be your dominant purpose, but please seek professional tax advice to be sure.