Borrowing and onlending Interest Free to a Discretionary Trust and Interest Deductibility Interest will not be deductible where a person borrows money and then lends to a discretionary trust interest free. There is no connection between the expense incurred by the individual and any income of the individual. Discretionary trusts are discretionary and therefore there is no guarantee that the lender will ever get a return on their ‘investment’ from the trust. The same applies where the funds are gifted to a trust. Any interest on monies borrowed and gifted to a trust will not be deductible because there is no association with any income production. However, the interest may be deductible to the person where the trustee is a hybrid trust or a fixed trust. If the person is guaranteed income and capital of the trust then they may be entitled to claim the interest on any loans to fund the trust. For an example PBR Authorisation Number: 1012046889183 RBA Content | Australian Taxation Office Therefore if you are borrowing money and diverting it into a related discretionary trust it may be best to enter into an arms length loan agreement with the trustee of the trust. The bank will charge you interest, you will charge the trust interest. The trust will pay you income, in the form of interest, which it can deduct, and against this income you can deduct the expense of interest paid to the bank. Keep in mind the interest rate should be market rates for deductibility to be maintained.