SMSF Bare Trusts

How much does it cost to set up a bare trust?

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.

What is a Declaration of 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:

• The sale contract is between the property vendor and the bare trustee NOT the SMSF trustee
• The purchase of the property was funded by the SMSF trustee and the lender NOT the bare trustee
• The role of the bare trustee is simply to hold the property and has no obligations unless directed by the SMSF trustee
• The bare trustee must not transfer the property back to the SMSF trustee until after the last loan repayment has been made
• Any documents regarding money that was provided by the SMSF trustee must be signed by the bare trustee so the bank (or other lender) can use the property as security

Important Things to Remember

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 documentation provided by the lender complies with the SIS Act in order to satisfy the borrowing exemption clause
• The SMSF Deed and Investment Strategy permit this type of borrowing, or are amended to reflect this before entering into an LRBA
• The borrowing arrangement has not been disguised as a contribution or in breach of the sole purpose provision
• The property, be it commercial or residential, has only one title, thus classifying it as a ‘single asset’
• All interest rates are commercially reasonable and properly documented, especially if the lender is a related entity

Stamp Duty

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.

• In ACT, NSW and Tasmania, the sale contract must be signed and dated before the Declaration of Trust
• In SA, QLD and the NT, the Declaration is signed first
• WA and VIC currently have no particular requirements

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.

Accurate Documentation

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:

• Product Disclosure Statement (PDS).
  • A PDS outlines the general terms and requirements of the SIS Act in regards to the borrowing of money by the SMSF. It should be provided to the SMSF trustee and each member of the fund before an LRBA and/or bare trust are entered into and also detail any and all benefits and potential pitfalls of such an arrangement
• All meeting minutes between:
  • SMSF trustees when the investment strategy is amended (if required)
  • SMSF trustees to discuss entering into an LRBA and bare trust arrangement in order to acquire property
  • SMSF and bare trustees where they accept the appointment as trustee and create the Declaration of Trust
• The Declaration of Trust
• A Statutory Declaration regarding the Declaration of Trust, and any copies of bank statements etc pertaining to this.