What Is a Bare Trust in an SMSF?

When a Self-Managed Super Fund (SMSF) decides to borrow money to purchase property through a Limited Recourse Borrowing Arrangement (LRBA), a special structure known as a bare trust (also called a holding trust or custodian trust) is required.

Bare trusts are a central part of limited recourse borrowing arrangements (LRBAs), ensuring that the SMSF remains compliant with superannuation law while protecting the fund’s assets and the lender’s security.

How an SMSF Bare Trust Works

In a standard SMSF property purchase without borrowing, the SMSF trustee directly holds legal and beneficial ownership of the property. However, when the SMSF uses borrowed funds, superannuation law requires that the property be held in a separate trust until the loan is repaid. This separate trust is the bare trust, which has its own trustee, often called the custodian trustee.

The custodian trustee holds the legal title to the property, but the SMSF is the beneficial owner. Once the loan is repaid, legal ownership can be transferred to the SMSF trustee. This arrangement ensures that if the SMSF defaults on the loan, the lender’s recourse is limited to the property in the bare trust and does not extend to other SMSF assets.

Why a Bare Trust Is Required

The bare trust structure exists to comply with the Superannuation Industry (Supervision) Act 1993 (SIS Act). Without it, the borrowing arrangement would not meet the rules for limited recourse borrowing, and the SMSF could risk breaching superannuation law. The Australian Taxation Office (ATO) has confirmed this requirement in SMSFR 2012/1, which outlines how LRBAs must operate.

Establishing a Bare Trust

Setting up a bare trust requires careful attention to legal documentation. The trust deed for the SMSF must permit borrowing, and a separate bare trust deed must be established before the property contract is signed. In many states, the bare trust deed must also be lodged or stamped with the relevant state revenue office within set timeframes, such as three months in New South Wales.

In some States, stamping duty applies.

Tax and Duties

While the bare trust itself is not taxed separately, trustees must be aware of state-based duties. Some states charge a nominal duty for stamping the bare trust deed, while others simply require lodgement.

Failing to lodge or stamp the deed can render it legally unenforceable, risk ATO non-compliance, and even jeopardise the SMSF’s limited recourse borrowing arrangement.

The Role of the Bare Trustee

The bare trustee has a very limited role. Its only responsibility is to hold the legal title of the property on trust for the SMSF. It does not receive rental income, pay expenses, or make decisions about the property. All income, expenses, and management decisions remain with the SMSF trustee, ensuring that the fund’s accounts and compliance obligations are maintained.

Why Bare Trusts Matter

Bare trusts are not simply a formality. They are the mechanism that allows SMSFs to borrow for property while keeping within the law and protecting members’ retirement savings. Understanding how they work, ensuring the trust deed is properly executed, and complying with stamping or lodgement rules are essential for trustees planning to use borrowing in their SMSF.

Summary

Mistakes in setting up the bare trust can have serious consequences. If the deed is incorrectly drafted, signed too late, or not lodged properly, the SMSF may fail the LRBA rules, which could lead to compliance breaches, tax penalties, and potential invalidation of the property purchase. Professional guidance from accountants, lawyers, and SMSF specialists is critical.

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(GENERAL INFORMATION ONLY)

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