Borrowing & Investing in Property Through a Bare Trust

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The SMSF is becoming increasingly popular and a lot of SMSF trustees are looking to invest into real estate as part of their investment strategy. However, there’s a minefield of traps that are in the way of unwary trustees and non-compliance with the superannuation legislation, which can have catastrophic taxation consequences for the entire SMSF and all of its members.

In this article I’ll talk about some traps and tips on how to avoid them when borrowing and how to acquire assets, real estate assets in particular. Although there are specific rules about the types of borrowing which is allowed by an SMSF, these rules have been significantly relaxed in the past decade.

investment strategy

Generally, all the borrowing is done through what is called a LRBA (Limited Recourse Borrowing Arrangements). In this borrowing arrangement, the SMSF Trustee receives the beneficial interested in the asset which he purchases, but the legal ownership of the asset is held by the Holding Trustee. This is more commonly known as a Bare Trust SMSF. In this scenario, the trustee will have the right to acquire the legal ownership of the asset by completing one or more payments at which time he can require the Bare Trustee of the Bare Trust SMSF to transfer the legal title of the asset to him.

Here’s a brief explanation on the Bare Trust and how it works: it’s a trust where the beneficiaries are entitled as against the Trustee and the Trustee has no active duties towards the trust. The Bare Trustee can be any Trustee in the fund, except the Super Fund Trustee, because the Trust relationship can’t exist when the Trustee is holding the trust property for himself. Even though there’s nothing illegal with having an individual as a Bare Trustee, it’s strongly advisable to have a corporate Bare Trustee in place so that any movements or deaths in underlying membership of the fund won’t affect the Bare Trustee’s property holdings.

The Bare Trust is usually set up if you need to take a loan from a private loaner, bank or any other source and can only be set up if you’ve identified the property the fund intends to purchase. As soon as you’ve done so, you can contact an SMSF management professional and give him all the relevant details and he can set up your Bare Trust for you in a matter of hours. The information includes property details, bank details and loan information. However, you need to be wary as there are different requirements for each state regarding whether or not you should sign the Bare Trust Deed, before or after signing the contract of the purchase.