Renovating IP in a Hybrid Trust Structure

Hi all,

Let’s say I’m planning to buy a negatively geared house IP using my Hybrid Trust (I am the trustee). So in other words, I take out the loan and purchase Special Income units from the Trust.

This way the Trust owns the house, but the loan is in my name. Also I think that there is no relationship between my loan and the Trust ownership of the house. Is this true?

This is important because of what I’m about to propose next.

Now that the property has been settled, rather then renting out the property to tenants straight away and renovating at some later time, can I perform a major renovation straight away and claim the interest paid to the bank as a increased negative gearing loss.

Here’s a summary on the hypothetical time scale.

1 Jul – Settlement
1 Jan – Finished renovation and put advertised house for rent
1 Feb – House rented for the rest of FY.

Assumptions
$1,000 is paid per month in Interest
$1,000 is paid per month by tenants
There are no other expenses incurred (eg rates etc)

Now what will happen at tax time?

From the borrowers point of view (ie the person that bought the Special Income Units), I incurred a loss for the year with only getting income for 5 months. So my loss becomes $7,000 for the year.

Can I claim the full $7,000 against my income? Or can I only claim $1,000 because the house was only advertised since 1 Jan?

My thinking is that my loan is independent from what the trust does, so I can think of it like a managed fund of sorts. Is my thinking wrong?

Any points of view are welcome.

Regards,

Orion