Are you an Australian with a Self-Managed Superannuation Fund (SMSF)? The number of Australians with SMSFs will exceed a million this year as SMSFs become more valuable. If your SMSF wants to invest in property, you’ll soon learn that an SMSF itself cannot borrow money in its own right. You’ll need a Limited Recourse Borrowing Arrangement (LRBA) to allow your money to be used to purchase an investment, to be held in a Bare Trust for your future provision. So what exactly is a Bare Trust and what benefits does it offer?
When property is purchased, it has a legal and beneficial interest. These interests need to be separated in a formal Declaration of Trust outlining that the asset won’t be used for personal use but strictly for investment purposes. The legal ownership is held by a Bare Trust, allowing the SMSF (as beneficiaries) to retain true ownership until the loan is paid off. This Bare Trust is merely a Registered Owner/Custodian Trustee – all transactions and decisions will occur with and by the SMSF.
There are many benefits to using a Bare Trust arrangement. Because it’s occurring as an LRBA, should the loan be defaulted on, any other assets held by the SMSF won’t be considered – bearing in mind that the loan will most likely have to be member guaranteed.
It’s a great option when a single property will be purchased that doesn’t require significant renovations. It makes administration easier as the Trustee can borrow from the bank on behalf of the SMSF and as it’s not a reportable entity doesn’t require an ABN or TFN. In addition, the Bare Trustee can also be anyone nominated, except the actual SMSF fund members – although it’s highly recommended that a company be nominated in order to limit liability should something go wrong.
A Bare Trust is one of the simpler options for property investment, but like most things SMSF related, you can only get the full value of it by doing as much research as possible before entering into one and by working with professionals who can assist you with setting up a company correctly from the outset to prevent problems from developing down the road.
With such a convoluted and intricate setup, we encourage you to come to us with any of your Bare Trust questions. We have the years of experience to help you get the most of your investment.