Key takeaways
- A bare trust (holding trust) holds legal title to an asset bought under an LRBA while the loan is outstanding.
- The SMSF is the beneficial owner and receives the income and growth.
- Once the loan is repaid, legal title can transfer to the SMSF.
- The bare trust must be in place before the purchase contract is signed.
In an SMSF borrowing arrangement, the bare trust (also called the holding trust) does one job, but it is an essential one. It holds the legal title to the asset while the loan is being repaid, so the borrowing can be limited recourse. Get it wrong, or set it up too late, and the whole arrangement can fail.
What a bare trust does
The bare trust holds legal title to the asset on behalf of the SMSF. The fund is the beneficial owner, which means it carries the economic interest: it receives the rent, bears the costs, and benefits from any growth. The bare trustee holds title but has no active role beyond that, which is what makes the trust 'bare'.
Why a separate trust is needed
Limited recourse borrowing requires the borrowed-against asset to be held separately from the fund's other assets. The bare trust provides that separation. If the loan defaults, the lender can look only to the asset in the bare trust, protecting everything else the fund holds. See LRBA explained.
The timing trap
This is where people come unstuck. The bare trust must exist, and the purchase contract must be signed in the correct name, before settlement. Signing the contract in the wrong name, or setting up the trust after the purchase, can break the arrangement and trigger extra duty or tax. The order is not flexible.
When the loan is repaid
Once the loan is fully repaid, the asset can be transferred from the bare trust to the SMSF directly. In many cases this transfer can be done without triggering additional stamp duty, but that depends on state rules and the trust being set up correctly in the first place, which is another reason to get the documents right at the start.
Frequently asked questions
- What is the difference between the SMSF and the bare trust?
- The bare trust holds legal title to the borrowed-against asset while the loan is outstanding. The SMSF is the beneficial owner, receiving the income and growth and making the loan repayments. Once the loan is repaid, title can pass to the SMSF.
- When must the bare trust be set up?
- Before the purchase contract is signed and before settlement. Setting it up late, or signing the contract in the wrong name, can break the borrowing arrangement and create extra duty or tax.
- Who is the bare trustee?
- A separate entity, often a company, that holds legal title to the asset but takes no active role. It must be distinct from the SMSF trustee. Your adviser will structure this as part of setting up the arrangement.
