If you’re looking to invest in residential or commercial property holdings as part of your SMSF Investment Strategy, there are a few additional steps you need to take before you can sign off on any loan.
The Superannuation Industry (Supervision) Regulations 1993 (SIS Act) was relaxed in 2007 to enable SMSFs to purchase property, however legal restrictions around this type of investment remain in place. This is because SMSFs are unable to borrow money, and as such, any loans they require to purchase assets of this type must be held by an external entity in the form of a bare trust.
The superannuation sphere is always evolving and so it’s important to keep on top of changes to regulations to avoid getting hit with any penalties for non-compliance.
A bare trust is an entity used by self-managed super funds in order to acquire a bank loan, generally for the purpose of purchasing real estate. As the SIS Act does not allow for SMSFs to borrow money unless under a Limited Recourse Borrowing Arrangement (LRBA) with a bare trustee as the legal holder of the mortgage.
This means that although the bare trust is owned by the SMSF, the property (and the mortgage) is held by the bare trustee, who then becomes liable for any legal repercussions.
So, in the event of a mortgage default, the recourse is limited to the bare trust and not the SMSF as a whole, protecting finances and other assets held by the fund and its trustees.
Setting up a bare trust costs $1,400+GST
Some banks may establish the bare trust and the loan agreement themselves, in which case you will only need to create the corporate trustee, which cannot be the same as your SMSF trustee.
Another thing to keep in mind is that, depending on the lender you chose to borrow through, it may be required that both your SMSF and Bare Trustees be corporate entities. That is, corporate trustees rather than individuals.
Legally, you are able to have an individual act as a bare trustee however it is strongly advised by professionals in the SMSF space that you have a corporate trustee in place for both your SMSF and the bare trust. The benefit of a corporate entity is that any changes in fund membership, be it through death or voluntary withdrawal, will not affect the property held in by the bare trust.
Once you’ve established a bare trust and nominated a bare trustee, the next step you need to take before purchasing property is to create a Document of Trust. This legal document can be organised by your SMSF accountant and is used to outline the purchase terms for the property you’re looking to invest in.
Not only does the Declaration need to follow SIS Act regulations, but the financier (ie the bank) must also agree to and accept the terms.
Provisions included in your Declaration of Trust are:
LRBAs and SMSF Compliance
Before choosing to enter into a limited recourse borrowing agreement to purchase property for an SMSF, the trustee must ensure:
The order in which the Declaration of Trust is signed by the bare trustee and the lender is important. If the contract is dated incorrectly, you may be required to pay double stamp duty.
At present, the requirements differ depending on your state.
Once the mortgage has been repaid in full and the property is returned to the SMSF, it is possible for stamp duty fees to be levied. Because there was technically no change in the beneficial ownership of the property when it was transferred from the bare trustee back to the SMSF, you may only need to pay a concessional rate of stamp duty. However, stamp duty fees are determined on a state-by-state level and so the rate of concession, if any, will differ depending on where the property is located.
In order to receive this concessional rate you will be required to prove that you are the ‘apparent purchaser’ and so additional documentation – such as a Statutory Declaration – detailing how the bare trustee obtained money for the property will need to be kept.
As such, it is recommended that this documentation be completed at the same time as the Declaration of Trust to ensure it is not overlooked.
Property investment in SMSFs is a risky space and so the regulations surrounding this type of asset are strict. To ensure your fund remains compliant with the ATO’s requirements, you will need to prepare additional documents relating to the bare trust and loan.
These documents are:
Once an SMSF is established it can set up a bare trust at any time which is either done directly via the lender or via your accountant. Some second-tier lenders require you to use their bare trust documentation while the majority just ask your accountant to set it up for you.
The Bare Trust needs to specifically reference the property you are purchasing and the lender you are borrowing from so it is usually beneficial to wait until you are ready to sign a contract to get everything underway.
The setup includes starting a company to act as the corporate trustee from ASIC and then organising the deed from the lawyers. The turnaround time is usually a few business days, and the process is very easy to complete.
You should set up a bare trust once you have identified a particular property to purchase via your SMSF and the lender has given verbal approval that they will write the loan for the property. The bare trust deed itself will actually reference both the property being purchased as well as the lender the funds are being borrowed from.
In an SMSF context you would setup a bare trust where you need to borrow funds against an asset as an SMSF is restrained from borrowing directly and thus must use a bare trust when borrowing funds. The most common purpose of setting up a bare trust for an SMSF is to borrow funds to purchase either a residential or commercial property with an associated mortgage on that property.
The bare trustee is another name for the corporate trustee of a bare trust which is the company that is created to be the manager of the trust. The bare trust itself is a specialised form of trust designed to hold property on behalf of a single fixed beneficiary who has the absolute right to the capital, assets and income generated by the trust.
Yes, your SMSF will receive rental income and also pay any property expenses such as council rates and maintenance. The SMSF is also responsible for paying the mortgage back to the lender as it was the entity which borrowed the money to purchase the property being held by the bare trust
No. Only a single title can be held by any one bare trust. This also means that a block of units or multi-space office complex cannot generally be held by a bare trust as these properties contain more than one title.
Should you wish to acquire more than one single-titled piece of real estate at any given time, you are required to set up a bare trust for each investment and home loan.
Nothing! The bare trustee has no obligations or responsibilities aside from holding the investment property on behalf of an SMSF. Once the loan is paid and the property reverted to the super fund, the bare trust is dissolved.
When the mortgage has been repaid to the lender in full, the property title will be transferred to the SMSF trustee at which point the bare trust and its trustee are no longer required. Bare trusts are not automatically ended, however, so you will need to advise the titles office of this change.
The bare trustee owns the property as they are the entity who signed the contract of sale. The title deed will also list the name of the bare trustee as the legal owner of the property.
However, the sole purpose of the bare trust and its trustee is to hold this property in name only until such time that the loan has been paid in full. It is then transferred back to the SMSF.
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