BUS350 Taxation Law Semester 2, 2018 Assessment 2: Tax Case Analysis This assessment is worth 30% of your final grade and is to be in case analysis form. Length of paper (excluding references) is...

EXECUTIVE SUMMARY
The following analysis is carried out of the case Commissioner of Taxation v Hart [2004] HCA 26; 217 CLR 216; 206 ALR 207; 78 ALJR 875 (27 May 2004) where the main issue involved is the implication of the Part IVA to the transaction involved. The Respondent Trudy Amanda Hart & Anor entered into an arrangement by way of taking loan and splitting the same into two one for the purchase of residential property and another for refinancing an investment property held and also arranging the repayment in such a manner in order to obtain the tax benefit knowingly or unknowingly and the Appellant the Commissioner of Taxation challenged the same and also contended the application of the Part IVA to the said transaction and disallow the deduction claimed by the respondent. The case also highlighted the definition of the term scheme which is to be taken in both broader and narrow sense. The narrow version of the term scheme is also of utmost importance in deciding whether the transaction is taken to avoid taxation knowingly or unknowingly. The Honourable High Court bench of Chief Justice Gleeson and Justice McHugh, Justices Gummow and Hayne and Justice Callinan in three separate judgements made the decision in favour of the Commission by going through the various facts and issues involved in the case and thus disallowed the deductions made by the respondent.
Commissioner of Taxation v Hart [2004] HCA 26; 217 CLR 216; 206 ALR 207; 78 ALJR 875 (27 May 2004)
Parties Involved
Commissioner of Taxation is the Appellant in the case and Trudy Amanda Hart & Anor are the Respondents in the case.
The Facts
In the given case the taxpayer took an amount of loan from Austral Mortgage Corporation Pty Limited for the purpose of refinancing an existing property and also in order to purchase a new property. The agreement of the loan taken by the taxpayer contained the terms as to divide the amount of loan in two separate loan accounts for two different properties and also the repayments to be made on monthly basis for one or both the loans taken.
On the basis of this the Harts opted for splitting the total loan amount into two loan accounts one for the residential property as Residential Property Account and the other for the investment property as the Investment Property Account. Also the Harts also used the option of monthly repayments and apportioning the same to the Residential Property Account. As a result the principal amount on the Residential Property Account was paid at higher rates as against the payments made in respect of the Investment Property Account. Thus the amount of interest on the Investment Property Account compounded and the taxpayers claimed the same as a deduction under section 51(1) of the ITAA36 and section 8-1 of the Income Tax Assessment Act 1997.
The same effect was disallowed by the Commissioner under both the sections that is section 51(1) of the ITAA36 or section 8-1 of the ITAA97. The Commissioner on the contrary was of the opinion that the transaction involved in the given case applied the general anti-avoidance provisions contained in Part IVA in order to get rid of the tax benefit by the way of the difference between the amount of interest accrued on the Investment Property Account and the same that would have been incurred in case the principal amount of the investment property account paid.
History of the case
In 1996, the Harts borrowed $298,000 from Permanent Custodians Limited through an agent namely Austral Mortgage Corporation Pty Ltd to refinance an existing property and also to purchase a new property. The taxpayer used $95,112 of the total amount to repay the existing loan amount on the property which earned income and is termed as investment property. The balance of the amount borrowed ($202,888) was used to purchase a new property which was to be used for residential purpose by the taxpayer. The loan taken carried varied rate of interest on the basis of the prevailing market rates and also was to be repaid in 300 monthly payments. As per the terms of the loan agreement the monthly repayments made by the taxpayer were credited to the residential property account and the interest on the investment property account was accrued and compounded and capitalised.
The taxpayers claimed the amount of interest compounded as...