Subject: Income Tax Law

Interest Rate Adjustments for Mortgages

Kirsty owns an investment property, as well as her own main residence. Each of the two houses were purchased with a mortgage. Both of the mortgages have an amount owing of $1m each. As the mortgages are both with the same bank, Kirsty enters into an arrangement with the bank: instead of paying 2.5% interest on each loan, she will pay 1.5% interest on her main residence loan and 3.5% interest on her investment property loan. The bank explained to her that this would be beneficial for her, because the interest on the investment loan is tax deductible, whereas the interest on the main residence loan is not.

Required: Discuss the tax implications for the possible application of ITAA 36, Part IVA, to the interest rate adjustments for the mortgages?