SMSF bare trust for property: when you need one and how it works

If your client’s SMSF is borrowing to acquire real property under a limited recourse borrowing arrangement (LRBA), a bare trust is required by law. The bare trust holds legal title to the property while the loan is outstanding. The SMSF trustee holds the beneficial interest. Once the loan is fully repaid, the SMSF trustee has the right to have the property transferred from the bare trust to it.

The requirement comes from section 67A of the Superannuation Industry (Supervision) Act 1993 (SIS Act). Under section 67A, an SMSF can borrow to acquire a ‘single acquirable asset’ provided the asset is held on trust by a separate entity (the ‘holding trustee’ or ‘custodian’) for the benefit of the SMSF trustee until the borrowing is fully repaid. The bare trust deed is the document that creates this arrangement and defines the rights and obligations of the holding trustee.

The holding trustee of the bare trust must be separate from the SMSF trustee. If the SMSF has a corporate trustee (Company A), the bare trust’s holding trustee must be a different entity, either another company (Company B) or one or more individuals. The holding trustee’s role is passive: it holds legal title and does nothing else. It has no active duties other than holding title and, once the loan is repaid, transferring the property to the SMSF trustee. The SMSF trustee retains all beneficial rights and is responsible for managing the property, collecting rent, paying expenses, and servicing the loan.

Common pitfalls include using the same company as both SMSF trustee and bare trust holding trustee (this is not permitted and invalidates the LRBA), failing to execute the bare trust deed before the contract of sale is signed (the deed must be in place so the holding trustee is named as purchaser), and using a generic bare trust deed that does not comply with the specific requirements of section 67A. The ATO’s LRBA guidance is detailed and prescriptive, and non-compliance can result in the fund being in breach of the SIS Act.

An LRBA that does not meet the strict requirements of section 67A is not a valid borrowing. The consequences include: the acquisition of the property may constitute a contravention of the in-house asset rules, the fund may be rendered non-compliant, the ATO may issue a notice of non-compliance or impose administrative penalties, and in serious cases the fund may lose its complying status with retrospective tax consequences.

The bare trust deed should clearly identify the property being acquired, the SMSF trustee as the beneficiary, the holding trustee, the lender, and the terms under which the property will be held and ultimately transferred. It should also contain appropriate provisions for what happens if the SMSF trustee defaults on the loan (consistent with the limited recourse nature of the arrangement, where the lender’s recourse is limited to the property itself).

From a stamp duty perspective, the establishment of the bare trust and the subsequent transfer of property from the bare trust to the SMSF trustee after the loan is repaid may attract stamp duty depending on the state. Most states provide exemptions or concessions for transfers from a bare trust to the beneficiary, but the specific requirements and processes differ. This should be confirmed with reference to the relevant state’s duties legislation before the arrangement is established.

CoSec Partners prepares SMSF bare trust deeds for $473 including GST. Each deed is individually drafted and signed off by Key Legal, an independent external law firm, reviewed for compliance with section 67A and current ATO guidance, and includes all required schedules, trustee consent forms, and establishment minutes. If your client also needs a corporate trustee for the SMSF or for the bare trust, we offer combined packages. Contact us for a quote.