I'm certainly no expert on trusts, though I do have one, but this is the way I thought things worked with respect to the SIU's.
I take out a loan to buy SIU's in a trust, that I'm also a beneficiary of. The SIU's give me a right to the distributions of the trust in a pro-rata manner (ie if the SIU's I own make up half of the capital of the trust, then I'm entitled to half the Distributions). AFAIK this is required by the banks to enable me to finance the loan for the SIU's. It's like a guarantee of income that I put on the banks forms. As a beneficiary, the trust can (at it's discretion) distribute to me, though I don't have a right to this income (only to the SIU income if they are issued)
While the SIU's are issued, I retain this right to income, though it may be diluted by further SIU being issued.
The trust owns the property, so until the trust sells the property there is no CGT event with respect to the property. When the property is sold the trust must pay CGT out of the funds received, and in my mind, this happens prior to the distribution (though I'm sure that there are others mechanisms).
Anyway, getting back to the SIU's, if the trust takes out a loan in it's name (assuming it is now CF+) and buys back the SIU's at the issue price, then what we are left with is essentially a hybrid trust that owns a property that generates money. That money can be distributed to tax payers, which must pay tax on that income.
By way of example
Let's say I buy a house for $200K through a trust. I take out a loan for $200K to buy SIU's and the trust buys the house. Let's say it initially rents for $150 per week, so it is CF- (ignoring depreciation etc). It's negatively geared, so I claim the loss on my tax.
Let's say 5 years down the track, the rent has risen to $300 per week, so it is now CF+ so I decide that the trust should take out a loan and repay me my original $200K as redemption for the SIU's.
As a very rough approximation (for concept only), let's say that the trust now makes $100 per week after interest repayments. That $100 per week has to be distributed to the beneficiary's, all of which need to pay tax on the income (though admittedly these may be at different rates)
To me this seems like a pretty good investment for the long term (and is generally how I understand HDT's to work at a simplistic level).
Sure we've claimed against interest for 5 years, but I now have a trust distributing me income and it costs me nothing. The government is happy because I pay tax on that, and if/when the property is sold, the government gets the Capital Gains tax.
I fail to see how redeeming the SIU's at the cost price is avoiding tax.
If you paid Capital Gains on the SIU redemption, then surely that would need to reduce the Capital Gains paid on the sale of the propery from within the trust, otherwise you are paying capital gains tax twice on the same Capital Gain. Maybe it's possible to pay part of your capital gain on the SIU redemption, but why you'd want to, I don't know (maybe to offset a capital loss or something?)
The way I see it, the purpose of the SIU's is two-fold. Firstly for the benefit of the bank so that they know that the funds are due to you when they are assessing your for credit, as they would be if you owned the property in your own name, and secondly the guaranteed distributions ensure that tax deduction from the borrowed funds is associated with an income, so that it is legally claimable. Without the SIU's it would be possible to borrow money and distribute income to someone else which would make the interest on the borrowed funds non-deductible, as you are not expecting a return from the investment.
Does this make sense, or have I missed something?