DESCRIPTION
The taxpayer and/or spouse establishes a unit trust with a company as trustee. The taxpayer and/or spouse initially acquire a small number of units in the trust. The taxpayer and/or spouse are the directors of the trustee company. 2. The taxpayer borrows an amount of money that approximates the value of a yet to be acquired residential property and uses the borrowings to acquire more units in the trust. The trust gives a guarantee to the lender over the taxpayer's borrowings. 3. The unit trust then purchases a residence that is leased to the taxpayer and/or spouse at market rental with annual rent reviews. The trust grants a mortgage over the residence to the lender as security for the taxpayer's borrowings. In some cases the term of the lease is for 50 years. 4. Subsequently, the taxpayer and/or spouse pay rent to the trust under the lease. The trust pays the expenses on the property such as water and council rates and insurance. The trust claims deductions for those expenses and also claims any depreciation or other capital allowance deductions that apply in respect of investment properties. 5. The trust's taxable income is distributed to the unit holders. The taxpayer, as the major unit-holder, receives most of this distribution and it is included in his or her tax return as assessable income. 6. The taxpayer claims deductions against that income for the interest that is paid on the borrowings used to acquire the units in the trust. This results in an overall loss from the arrangement to the taxpayer that is offset against other income.