Speak to your accountant before setting up a bare trust
When buying an investment property for a self managed superannuation fund (SMSF), the mortgage itself cannot legally be held in the name of the SMSF.
For this reason, a bare trust first needs to be set up to apply for a home loan and purchase the property, with all benefits going to the SMSF beneficiaries.
Why do I need to set up a bare trust?
If you have the funds available, you can purchase a residential or commercial property outright using the funds in your SMSF.
However, many people start buying property for retirement planning early on in life and haven’t accrued the funds necessary, so a home loan is needed.
You can apply for an SMSF loan to purchase an investment property but, under the Superannuation Industry (Supervision) Regulations 1993 (SIS Act), the property and mortgage must be held in the name of a bare trust or custodian trust.
In this way, you meet the requirements of having entered into an arms-length purchase under a Limited Recourse Borrowing Arrangement (LRBA).
Outside of buying real estate for your self managed super fund, bare trusts are often set up as a way of legally hiding your identity as a purchaser of assets and shares.
This may be done for asset protection or estate planning reasons.
It’s essential you speak to your accountant if you’re looking to purchase an investment property for your SMSF.
If you’re looking to start the SMSF loan process, call us on 1300 889 743 or fill in our online enquiry form and we can help you borrow up to the maximum loan amount at a great interest rate.
How do I set up a bare trust?
You can only set up the bare trust once you’ve identified a property you intend to purchase for your SMSF.
You’ll need to provide all of the legal details of the property to your accountant first.
The purchase must pass the sole purpose test and align with the SMSF investment strategy, as written in the trust deed.
It’s essential that you speak to a solicitor first to confirm that your SMSF trust allows for the purchase of property for investment purposes.
Some states require the trustee to indicate the bare trustee as the purchaser, while others want both the bare trustee and SMSF trust’s name.
From the banks’ perspective, they have their own requirements and may even accept an individual as the bare trustee as opposed to a corporate trustee. At any rate, they’ll require a copy of the bare trust deed as part of the application process.
Once the bare trustee has been nominated by the SMSF trustee, the SMSF must create a Declaration of Trust establishing the terms of the purchase. Again, this can be organised with your accountant.
Once the declaration has been signed and dated, your relevant state registry office will need to verify and stamp the trust deed.
You should seek advice from a qualified account and solicitor before setting up a bare trust for your SMSF.
Who owns the property?
How it works is that the SMSF members (you and your spouse) will act as directors of two separate entities: the Corporate Trustee Pty Ltd and the Custodian Trustee Pty Ltd.
The Corporate Trustee Pty Ltd is the trustee of the SMSF, which receives the benefits and covers the costs associated with the property.
The Custodian Trustee Pty Ltd is the trustee of the bare trust, which holds the investment property for the sole purpose of benefiting the SMSF beneficiaries.
How much does it cost to set up a bare trust?
It depends on the trustee that you choose, but a rough estimate is around $2,850 if you’re setting up a self managed super fund and bare trust from scratch.
This cost drops to around $1,900 if you already have an SMSF and don’t have to set up a corporate trustee.
Avoid paying double stamp duty!
The order in which you sign the trust deed and the Contract of Sale for the property may result in you paying double stamp duty.
Your accountant will let you know the requirements for your state:
- The Australian Capital Territory (ACT), New South Wales and Tasmania require the Contract of Sale to be signed and dated before the bare trust deed.
- South Australia, Queensland and Northern Territory required the bare trust deed to be signed first.
- For Western Australia and Victoria, there are no particular order requirements.
The regulations can change pretty regularly around this, so it’s essential that you speak to your accountant to ensure that you’re complying with current SMSF regulations.
Which entity signs the Contract of Sale?
The bare trustee must sign the contract as the legal purchaser.
Avoid references to the bare trustee’s capacity as the trust of the bare trust in order to avoid double stamp duty.
The title deed should just show the name of the bare trustee as the registered owner of the owner of the property.
Which entity receives the rental income?
In a bare trust structure, the SMSF receives rental income and can claim negative gearing come tax time.
Bear in mind that while the SMSF receives that benefits, the fund is also liable for all property related costs, including mortgage repayments, GST payments, land tax, and property maintenance and repairs.
How many properties can I hold in a bare trust?
Only one home loan can be facilitated in a bare trust at a time.
That means a bare trust is required to be set up for each title on the property you want to purchase.
The property will revert to the SMSF once the mortgage is repaid.
What is the role of the trustee of the bare trust?
The trustee of the bare trust is simply the nominee of the beneficiaries and they have no active duties other than releasing the property to the SMSF once the home loan has been paid off.
Regulatory speaking, the bare trustee is simply a mechanism or the “puppet” that’s actually controlled by the SMSF beneficiaries.
Common pitfalls to avoid
- Individual or corporate trustee ownership: There are benefits and drawbacks to both types of ownership, particularly in regards to asset protection and the ease of selling the property should you need to do so. Properties with multiple titles: If the property has the potential to be sold separately, separate titles are required for each property or title. This applies to purchasing multiple units on one title but can also apply to some types of commercial real estate.
- Minimal negative gearing benefits: This common method of reducing your taxable income doesn’t work quite as well as when you are buying an investment property in an individual name purely because SMSFs operate in a low tax environment. This is something to factor in when considering your investment strategy with your financial adviser.
Want to apply for an SMSF loan?
We highly recommend seeking financial advice before purchasing a property for your SMSF, ensuring that your bare trust structure is set up in your favour.
Please call us on 1300 889 743 or fill in our free assessment form if you’d like to apply for an SMSF home loan.