Can an existing Bare Trust be used to purchase a second property?
No, a bare trust cannot be reused when it ceases to hold property on behalf of a SMSF after the loan has been repaid and the title transferred to the SMSF trustee.
The purpose of the trust ceases when the title is transferred. Generally, the bare trust rules will state that the bare trustee acts on the direction of the SMSF trustee. Typically, a resolution to wind up the LRBA and transfer the asset to the SMSF trustee is executed and a direction made to the bare trustee to do this.
A separate bare trust is required for each single acquirable asset purchased using a limited recourse borrowing arrangement (LRBA).
However, if a company was the bare trustee, it can be used in another LRBA although generally it is not recommended for it to act as the trustee for more than one LRBA at the same time. In practice it is rate for the trustee to be reused as it creates risk for the SMSF with no real benefit.
Hint – When the property is transferred from the bare trustee to the SMSF trustee ensure the lease is updated to reflect the lessor and on transfer of the title ensure that land tax and rates have been transferred into the name of the SMSF trustee (subject to the laws operating in that specific state).
In-house assets
To ensure the bare trust is not caught as a related trust of the SMSF, which is prohibited under the in-house asset rules, it must only include a single acquirable asset. The trust cannot include assets such as a bank account or any other asset.
The bare trust is a related trust of a SMSF. However, an exception exists under ss 71(8) of the superannuation laws (SISA). The bare trust will not be an in-house asset provided:
- the bare trust meets all of the requirements in relation to the borrowing rules under SISA
- the only property of the bare trust is the single acquirable asset
- the asset held would not be an in-house asset of the SMSF if the SMSF owned it directly
The ATO made a determination under SPR 2014/1 that an exemption also applies to a bare trust before a loan has been established or the property has not actually been transferred to the bare trust. This exempts a bare trust from being caught as an in-house asset before the LRBA has been completed and also extends to the bare trust after the borrowing has been repaid and prior to the title being transferred to the SMSF trustee or sold.
Example
Bob’s SMSF pays a deposit on a residential unit which is an off-the-plan purchase. The SMSF trustee will use a LRBA as part of the purchase consideration. The deposit is paid from the fund’s cash resources and a contract is signed by the bare trustee, which was established prior to the bare trust, to purchase the unit when the development is completed. As part of the arrangement a bare trust is established just before settlement and a loan established with a lending institution using the unit as security. The furniture package is not included, and the single acquirable asset is the unit. The unit will be leased to unrelated parties which is an asset the SMSF trustee could have acquired directly.
The bare trust is a related trust of the SMSF, but it is exempt from being an in-house asset of the fund.
Hint – states/territories have various timing in relation to when a bare trust should be signed, when the contract is entered into and who should be the purchaser in relation to the application of stamp duty. Checkout our guide for a breakdown of the Bare Trust stamping and naming rules covering the differences between the states.