A portfolio loan product that gives borrowers a “loyalty discount” on the home loan interest component of a multi-loan facility has received a favourable ruling from the Australian Taxation Office, which says the loan is not designed for tax avoidance.

In a recent product ruling (PR 2017/13), the ATO ruled that the anti-avoidance provisions of the Income Tax Assessment Act will not apply to deny a borrower using Synergy Home Loans’ Pivot Portfolio Loan Facility a deduction for interest incurred on their investment loans.

The loan is also marketed as the Switzer Pivot Home Loan.

It includes a “customer loyalty rebate”, which is used to calculate a discounted interest rate charged on a home loan where the borrower (or an associated entity) also has one or more investment loans with Synergy.

When the ATO looks at such arrangements, it asks whether a deduction “might reasonably be expected not to have been allowable to the taxpayer of the scheme had not been entered into.”

It also looks at whether the “dominant purpose” of entering into the arrangement was to enable the taxpayer to obtain a tax benefit in connection with the scheme.

In this case, the issue for the ATO is whether the application of the loyalty rebate has the effect of shifting interest cost from the non-deductible home loan to the deductible investment loan in a way designed to avoid tax. If the ATO found that reducing tax was the “dominant purpose” of the rebate, it would rule that it was a tax avoidance scheme.

The customer loyalty rebate is applied in recognition of the borrower’s broader loan portfolio and is applied to the borrower’s home loan interest rate, “while maintaining a total return on all money loaned to the borrower at a rate which produces an acceptable return to Synergy.”

In a typical borrowing arrangement, the home loan is secured by owner-occupied property and the investment loan is used to fund an asset that could be an investment property or any other kind of asset.

Where the investment asset is not a residential property, security for both the home loan and the investment loan will be the owner-occupied property.

The discounted rate on the home loan applies for 12 months and is then reviewed at the end of that time.

The investment will not be impacted by the discount facility and will remain on standard terms.

Neither of the loans involves any capitalisation of interest.