Looks like you have dug yourself into a bit of a hole.

You cannot withdraw from the existing loan or borrow for the new home and have it deductible because you will be living in it.

If only you had used an IO loan with a 100% offset account.

 You probably should enter into a loan agreement with the trustee and then you could just pay the funds directly where needed.

You personally borrowed money and onlent to the trust so the trust should be able to claim the interest on this loan. BTW, you should have a written loan agreement with the trustee.

The expenses for the reno and stamp duty would not be deductible outright. The stamp duty would be a cost to be claimed against a capital gain when you sell, and the reno would be depreciated costs. So you wouldn't have such as large tax deduction as you may have expected. This may mean the property won't be making a loss.

What is the purpose. You cannot borrow for an increase in valuation. You also cannot refinance $1000 you paid into the loan last year – or youcan but the interest won't be deductible.

I think this is dangerous. You shouldn't borrow money and place it in a savings account as that can break the nexus between borrowing and investing. see Domjan's case.

It all sounds very messy.

I would suggest you think long term. How long would the property be negatively geared?

Why are you using that company? and why would you take tax advice from them?

Would you take advice on nutrition from a person who worked at KFC?

Yes it would be better to borrow funds for the investment.

eg. Imagine you had a $1,000,000 home loan with $200,000 in the offset. This means you pay interest on $800,000.

If you took the $200,000 and used it for investment then you would now be paying interest on $1,000,000.
None of the interest would be deductible.

Instead, if you set up a LOC on your home for $200,000 then you would be able to borrow the $200,000 to invest. Your home loan would still be $1,000,000 and you would still have $200,000 in the offset. So you would be paying interest on $800,000 which wouldn't be deductible.

Net result is still interest is being paid on $1,000,000 but 20% of it would be deductible.

If you don't have enough equity in the home then it would be worth taking the $200,000 from the offset and paying it off the homeloan and then setting up a separate loan and reborrow it again. A bit of mucking around, but it would save you a fortune in tax over the years.

Money in an offset account is cash.

So if you use it to pay for new PPOR then this can be good as it results in a lower non deductible loan.

However, if you use cash to pay for an investment then this is not so good if you have non deductible debt. You will end up paying more interest for non deductible debt and less interest on deductible debt = more tax payable.

exiting the partnership should be easy. The other partners would agree probably if she is just gifting them her 'share'. But the lease and any guarantees will be the hard point.

BTW there may also be CGT consequences with this – but she may end up which a capital loss which can be used to offset future capital gains.

There is a NZ case, Canterbury Finance Ltd v Sagar Trust Ltd (1997) ANZ ConvR 119, which is given as authority for the view that a mortgagee will not be bound by a contract of sale entered into by a mortgagor, (unless consented). So the vendor's contract with you will probably not be binding on the bank once they take possession after a default.

see also
Law Mortgagees Queensland P/L v Thirteenth Corp P/L [1999] VSC 360
http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/vic/VICSC/1999/360.html

National Australia Bank Limited v McFarlane [2003] VSC 26
http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/vic/VICSC/2003/26.html