Separation of deductible/non-deductible interest for trust

Hello all,
I have set up a discretionary trust, with my wife and I as trustees, and have just settled on first IP. A loan (80% LVR) in both our names (as trustees for the trust) is secured against the IP. The balance of 20% came out of my investment LOC account (this LOC is in my name only). From recent threads, it appears that the interest attributable to this 20% IP cost is not deductible against my personal income, and that I will have to separate out this interest at year end for tax return purposes.

Is there a more appropriate way to finance the 20% balance IP cost, in terms of simplifying separation of deductible and non-deductible interest?. My wife and I also have a joint LOC (secured against PPOR) which we use for daily family expenses and to provide a buffer against no income periods. We could have paid the 20% balance out of this LOC, but we would still have the “problem” of separating the interest attributable to the IP from the interest attributable to personal expenditure. How do other people who use a discretionary trust structure manage payment of the balance 20% cost of an IP?


My option is to lend the trust the 20% at the same rate that the bank lends it to me. My personal finances show no loss/no gain and the trust can claim the interest it pays me as a legitimate deduction. I also have several accounts and try to keep those that are investment related very strictly 'pure'.

Isit necessary to prepare a formal loan agreement for the loan from you to the trust (including paying stamp duty on the loan agreement), and to keep records of interest payments from the trust to you, and from you to your lender?


ALWAYS, ALWAYS, ALWAYS keep full records of the trust decision, your own decision, the agreement, the amounts paid and everything else. It must be completely transparent and provable or the ATO will have your hide.

Dale points out in his book (which I highly recommend) that one of the things about the rich is the quality of the records that they keep in order to use the system to its full legal potential.

This has got to be one of the most fun games on earth, but if you don't know the rules and stick to them, you're the bunny.

I don't know where you are in investing but if you haven't already, get an accounting system and paper and computer records set up. I work on the assumption that I will get audited, and properly so.