Why do I need a bare trust?

The Superannuation laws (SISA) allow an SMSF to borrow money under a limited recourse borrowing arrangement (LRBA) provided the asset acquired is held on trust. SISA does not identify the type of trust that must be used under a LRBA.  It merely indicates the asset is to be held on trust on behalf of the SMSF trustee.

A bare trust can satisfy the limited recourse borrowing arrangement (LRBA) requirements.

Existing family discretionary trusts or unit trusts will not satisfy the LRBA conditions.

The SMSF trustee must have:

• a beneficial interest in the asset
• the right to acquire legal ownership when the loan is repaid

The asset must be a single acquirable asset such as a property generally held under a single title. The bare trust deed can limit the asset held by the trust to a single acquirable asset and the bare trust deed drafted to ensure the above points are fully compliant.

Goods and Services Tax (GST)

The bare trustee is not required to register separately for GST.

In accordance with a GST ruling 2008/3 the ATO adopt a look through approach in relation to the application of GST. The SMSF, being the beneficiary, will be the entity responsible to register and pay for any applicable GST obligations.

In-House Assets

A bare trust is not an in-house asset.

A bare trust is a related trust which normally is caught under the in-house asset rules. However, it comes under an exception provided the bare trust meets the requirements of the borrowing provisions, the asset is one which the SMSF could hold if it held it directly and the only asset of the bare trust is the single acquirable asset subject to the borrowing arrangement.

To be clear the exception applies to the establishment of a bare trust where the borrowing has not yet been established or the asset begun to be held and also to the situation where the asset continues to be held by the trust after the repayment of the borrowing.

Capital Gains Tax (CGT)

CGT will not apply to a bare trust.

When a borrowing is repaid, and the asset is being transferred from the bare trust back to the SMSF trustee CGT will not apply.

Stamp Duty

Stamp duty should be considered at the pre-contractual stage and subsequently when the property title is being transferred back to the SMSF trustee or possibly sold to another party instead of being transferred.

If you get stamp duty wrong, it could result in double stamp duty which can be very costly.

A stamp duty exemption might be applicable when a property is transferred from a bare trustee to the trustee of a self-managed superannuation fund (SMSF), known as the “apparent purchaser concession.” Under this concession, stamp duty is insignificant.

The exemption may be at risk if the full purchase price, including the deposit, was not paid directly from the SMSF’s bank account.    This is due to the evidence the office of state revenue requires showing the SMSF paid the full purchase price. In addition, they also require evidence that the bare trust was properly established and duly stamped.

Checkout our guide for a breakdown of the Bare Trust stamping and naming rules applicable in each State.

Hint – When a loan is repaid in full there is no requirement to transfer the title from the bare trustee to the SMSF trustee.  In fact, the property could be sold without the title ever being transferred to the SMSF trustee. However, the borrowing provisions continue to apply to the bare trust until the property is transferred.  This could be problematic if the asset owned by the bare trust is vacant land and the SMSF trustee wants to develop it which changes the nature of the asset which is prohibited under the LRBA.