Borrowing to Invest Through Your Family Trust

Getting the Interest Deduction Right

There are two clean ways to fund a trust investment with borrowed money and keep the interest deductible. There is also a common approach that does not work — and it is worth understanding why before the ATO raises it with you.

It is a scenario we see regularly. You borrow money — perhaps against your home or an existing investment — and lend it to your family trust. The trust puts the money to work, earns income, and distributes that income back to you. At tax time, you claim the interest on your loan. The numbers look tidy. Job done?

Unfortunately, in most cases, no. The rule of thumb for claiming interest is straightforward: the borrowed money has to be earning you assessable income. The deduction follows the use of the funds. Lending the money to your family trust interest-free is different — that loan is not earning you anything. The distribution you later receive is not a return on your loan; it is the trustee choosing to share the trust's income with you, and with a discretionary trust no one is entitled to a distribution at all. Because the loan and the distribution are not genuinely connected, the legal link required — between your interest cost and your income — simply is not there. The ATO has examined exactly this kind of arrangement and takes a firm view: the interest is not deductible.

The good news is there are two clean ways to do it properly. Both depend on being set up correctly, in advance.

Option 1: A Genuine Loan to the Trust

The first clean approach is to treat it as a real loan. Your trust borrows the money from you and pays you interest at a commercial rate, properly documented. You declare that interest as income and claim your borrowing costs against it. The trust, in turn, can generally claim the interest it pays you, provided it is using the funds to earn its own income. The trade-off is that you carry interest income personally — which washes against your deduction but can quietly affect income-tested thresholds such as the Medicare levy surcharge.

Option 2: Let the Trust Do the Borrowing

The second — and often tidier — approach is for the trust to be the borrower from the outset. If the trust is going to own the investment and earn the income, the trust should carry the loan, so the deduction sits where it belongs: against the trust's own income.

The complication is that banks often will not lend to a trust directly; they want a real person on the loan, and usually security over your home. That is where an agency arrangement comes in. You sign for the loan as the trust's agent — meaning that, in law, the borrowing is the trust's, even though your name is on the facility because the bank requires it. The money goes to the trust, the trust uses it to earn income, and the trust pays the interest and claims the deduction. You declare no interest income and claim nothing personally.

The Catch — And It Is the Same for Both

Neither option can be fixed after the event. Both must be genuine and documented before you borrow. For the agency arrangement in particular, the trust deed must allow the trustee to borrow and to act through an agent; the trustee must resolve to appoint you as agent; and a written agency agreement must be signed before the loan is drawn down. You cannot create the agency retrospectively, and you cannot repair an interest claim once the money has already been borrowed the wrong way.

One thing neither option changes: you remain personally liable to the bank and will usually still provide the security. The structure changes who gets the tax deduction — not who the bank can chase.

If you are thinking about borrowing to invest through your family trust — whether to buy property, shares, or anything else the trust will hold — talk to us before you sign anything. The right structure must be in place before you borrow. It is straightforward to get right from the start, but impossible to fix after the fact.