Forums / Getting Technical / Finance / Question on interest deduction

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  • Profile photo of fxdaemonfxdaemon
    Join Date: 2013
    Post Count: 114

    Hi experts,

    When borrowing money to invest in a private unit trust set up and assuming
    that only 80% of the investors funds will be used towards settling
    on a property deal with remaining funds be kept for ongoing cashflow
    buffer purpose.

    Is the investor’s borrowed fund full interest charges be deductible or only
    pro rata?

    Unit trusts raises $1 million from 3 investors. The trusts then uses $800K
    as desposit and other closing costs to purchase an IP at $2.96 million,
    so the number looks like following:

    – Trust equity funds raised from unit investors: $1 million
    – Trust purchases IP at: $2.96m
    – Trust borrow 80% from bank: $2.37 million
    – Trust uses $800K from equity raised for 20% deposit and 7% for all other
    closing costs
    – Trust has $200K raised equity un-invested but used as cashflow buffer
    – Investor 1 invested borrowed fund of $500K into the unit trust at interest
    rate of 10% p.a so total interest p.a = $50K.

    However, since only $800K is invested by the trust in actual income generating
    asset, does that translate to Investor 1 can only claim pro rata deduction of
    the $50K interest?


    Profile photo of TerrywTerryw
    Join Date: 2001
    Post Count: 16,190

    You are confusing a few issues here.
    The unit holders could potentially borrow to acquire units in the trust. If it is a fixed trust they could claim the interest on borrowings used to acquire these units. Claim the interest against their personal income.

    The trustee could borrow to acquire a property and any interest on such a loan would generally be a trust expense.

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide)

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