Negative Gearing with Trusts

If an individual borrows to fund a purchase of income or finance units in a trust then then the interest on that borrowing is deductible to them. They of course also have the right to receive the income equal to what the individual would have received if they had purchased the property directly.

The vehicle used for this purpose is a hybrid discretionary trust which allows the trustee to issue income units.

Thus, if you have a property unit trust that is used to purchase a property and hybrid discretionary trustto distribute income producing units then the negative gearing works as per the following example.

The Hybrid Family Trust purchases units in the Unit Trust equivalent to the total cost of the property i.e., 412,000 units (assuming that each unit is $1 each). The bread winner, in this case, purchases 320,000 income units in the Hybrid Family Trust (the loan from the bank) and gifts or loans the remainder to its Trustee.

The beneficiaries all enjoy the profits from the distribution of the Hybrid Family Trust should there be any.

Notes:
1. The Trusts need to be established prior to the purchase occurring.
2. The Bank will want to see the trust deeds.