Paying off PPOR and using equity to borrow in trust

Thinking out loud here.
A trust can essentially borrow any amount of money for investment and claim the interest as an expense.
The secured equity against the loan doesn't have to be in the trust's name, i.e a guarantee.
What are the advantages and disadvantages to paying off one's PPOR and then using the equity to maximise borrowing in the trust?

 

The trust can gain access to borrowed funds and then the income could be streamed to lower tax paying beneficiaries.

 

A trust cant just borrow any amount of money and claim a deduction for interest. Any borrowing must alos have a nexus to production of income using the borrowed funds. Itrs not always clearcut.

If Trust A and B both borrow $100K and buy shares one of them may be non-deductible.
Trust A buys Telstra shares. Plan is that they pay a nice dividend and may rise in value.
Trust B buys shares in Capital Health. CAJ presently does not pay a dividend. The shares are bought for the view that they have a likelyhood they may rise in value.

Trust A can claim a deduction for interest. Trust B cannot.

Trust C may buy both shares....Or a mixed portfolio. The interest deductibility could be exceptionally complex to determine and if not made reasonably the ATO could deny the deduction. eg Shares are bought / sold and so the original loan and its use becomes blended and too complex to determine.

And then a trust is limited to a interest deduction not greater than its assessable income.

 

My understanding:
If trust #1 borrows 105% of the purchase price of an IP @ 5% and buys a property yielding 3.5%, then clearly there will be a shortfall between the rent and the interest bill. Plus depreciation.

Classic negatively geared position.

The trust cannot distribute its losses; they are quarantined and carried forward until such time as the rent rises to exceed the interest and depreciation costs.

If you had another IP in a trust #2 and it was sold, perhaps you could distribute (provided the deed was set up correctly) some or all of the capital gain from the sale in trust #2 to trust #1 to mop up some of the carry forward losses.

Is this correct?

 

Income from trust A could be distributed to trust B, but you would need to be careful of breaching the laws against perpetuities. The A trust would need to have a vesting date prior to the B trust - or the possibility of vesting before.