Interest deduction generators involving promoter controlled companies

A promoter approaches a taxpayer offering an investment plan involving investments in foreign companies, partly funded by re-financing of the taxpayer's existing home loan equity. Generally, the taxpayers involved do not understand the operation of the arrangement and are guided by advice from the promoter or their associate. 2. The promoter arranges for the taxpayer to refinance their existing home loan through a third party financial institution. Under the new loan, the taxpayer obtains two loan facilities: a home loan (Loan A) for the outstanding balance on their previous home loan; and an interest only investment loan (Loan B). The Loan B amount is the maximum offered by the third party financial institution having regard to the equity in the taxpayer's home. Both Loan A and Loan B are secured over the taxpayer's home. 3. The taxpayer makes the principal and interest repayments on Loan A. The promoter undertakes to pay the interest on Loan B on behalf of the taxpayer. 4. The promoter arranges a purported unsecured investment loan (Loan C) for the taxpayer. Loan C is provided on non-commercial terms by an entity controlled by the promoter, including either no recourse or recourse limited to the shares in the promoter controlled company. The Loan C amount is well in excess of the taxpayer's borrowing capacity under normal arm's length lending criteria. 5. Funds from Loan B and Loan C are purportedly used to purchase shares in various companies controlled by the promoter. None of these companies appear to be carrying on a business or otherwise producing assessable income. Generally, the taxpayer does not derive any dividend income from the purported share investments and in all cases appears unlikely to do so in the future. 6. The taxpayer claims the interest incurred on Loan B and the interest purportedly incurred on Loan C as allowable deductions. In addition, many taxpayers may also seek to obtain a PAYG withholding variation to reduce the amount of tax deducted from their salary or wages during the course of the financial year.