Funds not used for business purposes
The sub-trust can still invest the funds in the main trust using either Options 1 or 2, even if the funds are not used by the main trust for business purposes.
However, interest paid to the sub-trust by the main-trust would not ordinarily be deductible to the main-trust if the funds borrowed by the main trust are not used for business or other income producing purposes.
Repaying loan principal at the end of the investment
The main-trust is expected to repay the principal at the end of the term of the investment, in accordance with the investment agreement. Failure to do so may result in a Division 7A deemed dividend to the trustee of the trust.
Early repayment possible
You can repay some or all the principal any time during the term of the investment agreement. There would be no penalties associated with the early repayment of the principal. Interest should only be calculated on the funds actually owing at the time. Example 7 in PS LA 2010/4 provides a guide on how interest on Options 1 or 2 investment agreements should be calculated.