A Self-Managed Super Fund (SMSF) Bare Trust is a special-purpose trust used when an SMSF borrows to acquire property through a Limited Recourse Borrowing Arrangement (LRBA). The bare trust temporarily holds the legal title to the property while the SMSF has beneficial ownership, ensuring compliance with SMSF borrowing laws.
What is a Bare Trust?
A bare trust is a legal structure where the trustee holds an asset for the sole benefit of the SMSF. The SMSF retains all entitlements to the income and capital gains from the property, but legal ownership remains with the bare trust until the loan is fully repaid.
Why Use a Bare Trust?
- Compliance: SMSFs can borrow under strict conditions, and a bare trust ensures the property is held in line with Australian Tax Office (ATO) regulations.
- Asset Protection: Lenders’ rights are limited to the asset purchased, safeguarding other SMSF assets.
Key Requirements for SMSF Bare Trusts:
- Single Acquirable Asset: The trust must hold only one asset, such as a property on a single title. This rule extends to multiple titles only when they are indivisible (e.g., a house and land on separate titles but sold together).
- Separate Trustee: The bare trust requires a separate corporate trustee to hold the asset legally. This is distinct from the SMSF trustee, ensuring proper compliance.
- Declaration of Trust: A declaration or trust deed must be established before signing the property contract. This document formalizes the relationship between the SMSF and the bare trust.
Stamp Duty and State Variations:
Stamp duty laws vary by state and can apply to the transfer of property into a bare trust. To minimize costs, trustees must carefully structure the transaction and comply with state-specific requirements.
Loan Repayment and Asset Transfer:
The SMSF is responsible for all income, expenses, and loan repayments associated with the property. Once the loan is fully repaid, the SMSF can transfer the legal title from the bare trust to the SMSF without triggering additional taxes or duties.
Considerations Before Establishing a Bare Trust:
- Ongoing Compliance: Proper documentation, including meeting minutes and statutory declarations, is crucial to maintain compliance with ATO and lender requirements.
- Limited Recourse: In case of default, lenders can only claim the asset within the trust and not other SMSF holdings.
- Professional Advice: SMSF trustees should seek legal and financial advice to ensure the bare trust meets both regulatory and operational needs.
Benefits of SMSF Bare Trusts:
- Facilitates property ownership under borrowing arrangements.
- Protects SMSF assets from external claims related to the borrowed property.
- Provides a clear path for asset ownership transfer once loans are repaid.
By leveraging a bare trust, SMSFs can invest in property while maintaining regulatory compliance and safeguarding their members’ retirement savings.
For further information and detailed guidance, visit SMSF Australia’s Bare Trust Guide