A bare trust (also called a holding trust or custodian trust) is a trust established specifically to hold legal title to an asset on behalf of an SMSF during a limited recourse borrowing arrangement (LRBA). The bare trustee’s only role is to hold the asset. It has no discretion over how the asset is used or managed. All decisions about the asset are made by the SMSF trustee.
The bare trust is a legal requirement for SMSF borrowing. Section 67A of the SIS Act requires that the asset acquired under an LRBA be held on trust by a separate entity until the loan is fully repaid. The bare trustee can be an individual, a company, or another entity, but it must be separate from the SMSF trustee. In practice, a separate company is often established as the bare trustee.
The bare trust deed must identify the SMSF, the bare trustee, the asset being acquired, and the terms on which the bare trustee holds the asset. It must clearly state that the bare trustee holds the asset on trust for the SMSF and must transfer the asset to the SMSF trustee when the SMSF trustee calls for it after the loan is repaid. The deed should also address what happens if the SMSF defaults on the loan.
Once the loan is fully repaid, the SMSF trustee can call for the asset to be transferred from the bare trustee to it; the bare trust does not end automatically on repayment, and some funds leave the asset in the holding trust. For real property, this means a transfer of title at the relevant land titles office. Stamp duty exemptions for this transfer are available in most states, provided the transfer is properly documented as a change from bare trustee to beneficial owner.
At CoSec Partners, SMSF bare trust deeds cost $473 including GST. Each deed is individually drafted and signed off by Key Legal, an independent external law firm. If a separate bare trustee company is also required, the company registration is an additional $834.
Frequently asked questions
Can the SMSF trustee company also be the bare trustee?
No. Section 67A requires the asset to be held on trust by a separate entity. Using the same company for both roles invalidates the arrangement, and it is one of the most common LRBA defects found on audit.
When does the bare trust deed have to be executed?
Before the contract to buy the property is signed. The bare trust should be in place and the holding trustee named as purchaser on the contract, because the arrangement is what allows the fund to borrow. Setting it up after the contract is signed, or after settlement, is not a reliable fix and can expose the fund to extra duty as well as a SIS contravention.
What happens to the bare trust when the loan is repaid?
The SMSF trustee then has the right to call for the asset to be transferred from the bare trustee to it, although the transfer is not compulsory. For real property this means a transfer of title at the state land titles office. Duty exemptions are available in most states where the transfer is documented as a change from bare trustee to beneficial owner.
This article is general information only and does not constitute legal, financial, or tax advice. While we endeavour to keep content accurate and current, laws and regulations change frequently. For advice specific to your circumstances, please consult a qualified professional adviser. CoSec Partners Pty Ltd accepts no liability for actions taken based on this content.