Question on interest deduction

Hi experts,

When borrowing money to invest in a private unit trust set up and assuming
that only 80% of the investors funds will be used towards settling
on a property deal with remaining funds be kept for ongoing cashflow
buffer purpose.

Is the investor’s borrowed fund full interest charges be deductible or only
pro rata?

Example:
Unit trusts raises $1 million from 3 investors. The trusts then uses $800K
as desposit and other closing costs to purchase an IP at $2.96 million,
so the number looks like following:

– Trust equity funds raised from unit investors: $1 million
– Trust purchases IP at: $2.96m
– Trust borrow 80% from bank: $2.37 million
– Trust uses $800K from equity raised for 20% deposit and 7% for all other
closing costs
– Trust has $200K raised equity un-invested but used as cashflow buffer
– Investor 1 invested borrowed fund of $500K into the unit trust at interest
rate of 10% p.a so total interest p.a = $50K.

However, since only $800K is invested by the trust in actual income generating
asset, does that translate to Investor 1 can only claim pro rata deduction of
the $50K interest?

Thanks,
FXD