How does a Bare Trust work in an SMSF?
If investing in commercial or residential property is part of your self-managed super fund’s (SMSF) investment strategy, there are a few additional steps that must be taken. For instance, if you need to take out a loan to purchase, you’ll need to consider the structure known as a Bare Trust.
Read on to learn what a bare trust is, how it works and where it fits in an SMSF structure.
What is a bare trust and how does it work?
Self-managed super funds (SMSFs) have certain rules and restrictions when it comes to investing in property, one of which is that an SMSF cannot directly borrow funds from an external source, such as a lender or bank.
However, there are methods for an SMSF to obtain a loan that makes investing in commercial or residential property possible – one is through a Limited Recourse Borrowing Arrangement (LRBA).
Under an LRBA, a bare trustee holds the property title and mortgage on behalf of the SMSF. This is to add a layer of protection for the other SMSF assets and trustees in the event of a loan default.
Essentially, an LRBA and bare trust serve as the channel for SMSFs to borrow money from a third party.
How much does it cost to set up a bare trust structure in an SMSF?
The cost of setting up a bare trust structure can vary depending on the administrative requirements, who’s setting it up and the current state of the SMSF.
For instance, the cost of setting up a bare trust with Stake Super Property is A$1,199 (incl GST). This is a one-time fee that includes the registration of the company with ASIC along with the preparation of the Bare Trust Deed.
Additional costs may come into play depending on specific requirements. It’s always advisable to seek professional advice from an accredited financial planner or advisor to better understand your circumstances.
One other consideration is some banks and lending institutions will require both the SMSF and bare trustees to be corporate entities.
How do I set up a bare trust for my SMSF property investment?
First, identify the property your SMSF intends to purchase. Collect all relevant details, including property address, lot number, title reference etc.
It’s also recommended to determine the lender/institution you intend to borrow from, the reason for this is the deed for a bare trust will reference the chosen property and lender.
Once the property is identified, the bare trust can be set up quickly, often within hours if all information is supplied promptly.
Documents will then be drawn up, including the bare trust deed, which outlines the terms of the trust.
Who can set up the bare trust for an SMSF?
SMSF administration service providers, such as Stake Super, can prepare bare trust setup documents for SMSF trustees.
Stake Super uses legal document templates drafted by accredited solicitors and legal practitioners. Reputable and experienced legal parties draft these templates to ensure compliance with the Superannuation Industry (Supervision) Act 1993 (SIS Act).
SMSF trustees are strongly advised to seek independent legal and financial advice to establish a bare trust due to legal intricacies relating to superannuation legislation, tax implications, and to mitigate risks associated with any errors in establishing the appropriate structure.
What is a declaration of trust?
A Declaration of Trust is a legal document typically organised by your SMSF accountant that outlines the terms and conditions of a property purchase. The contents of the document are generally embedded in the bare trust deed.
The declaration must abide by SIS Act regulations as well as be agreed upon by the external lender. This is crucial for the legality and operational clarity of the investment and borrowing arrangement.
What happens when the loan is paid off?
Once the loan is fully repaid, the bare trust and requisite trustee are no longer needed. The property title may then be transferred to the SMSF.
Generally, there are no additional stamp duty implications as there's no change in beneficial ownership. However, it's advisable to check state-specific regulations for any obligations.
Alternatively, the property can remain in the bare trust structure.
Can I eliminate stamp duty when the loan is paid off?
Stamp duty levies when transferring the property title to the SMSF after the loan is paid off can vary from state to state.
It is often argued that there is no change in beneficial ownership, which may exempt the transaction from additional stamp duty. However, a minimal transfer fee generally applies.
Consulting the Revenue Office in your state or obtaining legal advice can clarify the specific requirements and any potential fees involved.
Considerations to remember before establishing a bare trust
Here are some other items to consider before establishing a bare trust:
Compliance with the SIS Act
Ensure your trust deed and SMSF investment strategy are updated to reflect current superannuation legislation. This includes the provisions for Limited Recourse Borrowing Arrangements (LRBAs). Doing so helps to maintain compliance and allows for necessary borrowing provisions.
SMSF and Bare Trust Trustee Requirements
Some lenders require both the SMSF trustee and the bare trustee to be corporate entities. Additionally, the trustees of the SMSF and bare trust must be different legal entities.
LRBAs and SMSF compliance:
Verify that lender documentation complies with the SIS Act, specifically the limited recourse borrowing clause.
Ensure the SMSF Deed and Investment Strategy permit the borrowing before entering into an LRBA.
Confirm the property is a single acquirable asset.
Ensure rates and loan terms/repayment are commercially reasonable and properly documented, especially when dealing with related entities.
Stamp duty considerations:
Be aware of the order in which the bare trust deed and the contract of sale are signed to avoid double stamp duty.
Understand stamp duty requirements that vary by state.
Upon full repayment of the mortgage, verify if concessional stamp duty rates apply when transferring the property back to the SMSF.
Bare trust deed stamping requirements vary across states.
Documentation:
Prepare a Product Disclosure Statement (PDS) outlining the terms and requirements of the SIS Act concerning borrowing by the SMSF.
Keep detailed meeting minutes, particularly when amending the investment strategy, discussing LRBAs, and establishing the bare trust.
Complete and maintain a bare trust deed along with any related Statutory Declarations and signed loan agreement (this is a must to be able to verify the LRBA cause for audit).
Speak to a specialist
Want to know more about Stake Super or have questions? Speak to one of our SMSF professionals.
Bare trust SMSF FAQs
The timings vary from state to state. As of January 2025, the timings are as follows:
- Northern Territory: Before contract date
- Queensland: Before or on contract date
- Western Australia: Before or on contract date
- New South Wales - After contract date
- Australian Capital Territory - After contract date
- Tasmania - After contract date
- Victoria - After contract date but before settlement
- South Australia - After contract date but before settlement
It’s always recommended you seek legal advice before establishing a bare trust to ensure compliance.
Typically, a bare trust is established for a single acquirable asset/property. If you wish to purchase an additional property with your SMSF, a new bare trust would need to be set up to follow superannuation regulations.
Yes, a bare trust can be used to acquire both residential and commercial properties. The type of property must align with your SMSF's investment strategy and comply with all relevant superannuation rules.
Absolutely. The bare trust merely holds the legal title of the property on behalf of the SMSF, it does not hold a bank account.
Any transactions in relation to the property, such as the receipt of rental income occurs via the bank account of the SMSF. This income is part of the SMSF's returns and can be used for further investment or meeting other SMSF obligations.
This is not financial product advice, nor a recommendation that a self-managed super fund (‘SMSF’) may be suitable for you. Your personal circumstances have not been taken into account. SMSFs have different risks and features compared to traditional superannuation funds regulated by the Australian Prudential Regulation Authority (‘APRA’). Stake SMSF Pty Ltd, trading as Stake Super, is not licensed to provide financial product advice under the Corporations Act. This specifically applies to any financial products which are established if you instruct Stake Super to set up an SMSF. When you sign up to Stake Super, you are contracting with Stake SMSF Pty Ltd who will assist in the establishment and administration of an SMSF under a ‘no advice model’. You will also be referred to Stakeshop Pty Ltd to enable your trading account and bank account to be set up in order to use the Stake Website and/or App. For more information about SMSFs, see our SMSF Risks page.
Ciara is a Commercial Manager at Stake Super, with over 10 years of experience in the SMSF industry and an MA in Accountancy and Finance from Heriot-Watt University in Edinburgh, United Kingdom. Having previously worked at a chartered accounting firm and one of the largest SMSF administrators in Australia, Ciara has extensive knowledge of SMSF compliance. She is also a current member of the SMSF Association.
