Using a Bare Trust for SMSF Borrowing and Asset Acquisition in Australia
The popularity of self-managed superannuation funds (SMSFs) is rising in Australia, with many individuals seeking greater control over their retirement savings and investment strategies. Among the various options available to SMSF Trustees, using a Bare Trust for borrowing and asset acquisition has garnered significant interest, particularly in the context of real estate investing.
Limited Recourse Borrowing Arrangements (LRBAs) play a crucial role in enabling SMSFs to borrow money for specific asset acquisitions while limiting the lender's recourse to that particular asset in the event of default. In 2007, the Australian government relaxed the borrowing rules for SMSFs, granting investors more flexibility in managing their retirement funds.
A key consideration in SMSF borrowing arrangements is the concept of "acquirable assets." These assets must meet specific criteria to be eligible for borrowing within an SMSF. Essentially, acquirable assets should not be money in any currency and must comply with the rules laid out by the Superannuation Industry (Supervision) Act, 1993 ("the Act") and other relevant legislation.
It must not be a prohibited investment under the Act or any other laws to qualify as an acquirable asset. Additionally, if the asset comprises a collection of items, such as a stock portfolio, it must share the same market value and be identical. The Act also addresses regulations related to replacement assets and their treatment under LRBAs.
The Bare Trust is a pivotal component of LRBAs in SMSFs. The SMSF Trustee holds the "beneficial interest" in the acquired asset in this arrangement. In contrast, the "legal ownership" of the asset is vested in a separate entity known as the "custody trust" or the "Bare Trust." The role of the Bare Trustee is to hold the legal title of the asset on behalf of the SMSF Trustee.
A distinctive characteristic of the Bare Trust is that it is a specific type of trust wherein the beneficiaries have absolute entitlements, and the Trustee has no active duties to perform. This feature is of significant importance in SMSF borrowing arrangements, ensuring a clear distinction between legal ownership and beneficial interest.
Selecting the appropriate Bare Trustee is crucial for the seamless and stable operation of the arrangement. While the Bare Trustee can be an individual, having a corporate Bare Trustee often proves advantageous, particularly in handling changes in underlying SMSF membership or potential trustee transitions.
The role of the Bare Trustee is particularly instrumental in real estate transactions within SMSFs. When acquiring real estate, the Bare Trustee signs the Contract for Sale as the legal purchaser. To avoid double stamp duty, it is essential to avoid referencing the Bare Trustee's capacity as the Trustee of the Bare Trust in the contract. The Title deed for the property will reflect the name of the Bare Trustee as the registered proprietor of the asset, thereby ensuring compliance with the Act.
Ensuring compliance with the Act and maintaining the integrity of the arrangement necessitates specific documentation. The "Declaration of Trust" is a critical document outlining the relationship between the Bare Trustee and the SMSF Trustee. It clarifies that the SMSF Trustee has provided all the funds for the asset's purchase while the Bare Trustee acts as a custodian on their behalf.
Drafting the Declaration of Trust requires adherence to the Act's requirements and the lender's criteria involved in the borrowing arrangement. It should unequivocally state that the contract for the property's purchase was between the vendor and the Bare Trustee as the apparent purchaser, with all funds provided by the SMSF Trustee and its lender.
Professional legal advice is advised for crafting an effective Declaration of Trust that aligns with the specific requirements of the Act and the lender involved.
Stamp duty considerations are vital aspects of SMSF borrowing arrangements. For instance, in New South Wales, double stamp duty may be applicable if the Declaration of Trust by the Bare Trustee is dated before the exchange of contracts. To secure concessional stamp duty rates, the SMSF must satisfy the Commissioner for Stamp Duties that the Bare Trustee was the "apparent purchaser" and the Super Fund was the "real purchaser."
Demonstrating this involves a Statutory Declaration, supported by bank statements and other relevant documents illustrating the flow of funds from the SMSF's bank account to the Bare Trustee.
Thorough and meticulous documentation is essential for SMSF borrowing arrangements. Adequate preparation of various documents such as a Product Disclosure Statement (PDS), meeting minutes, and statutory declarations, is crucial. The PDS provides general information on the SMSF borrowing process, benefits, risks and potential costs.
Meeting minutes of the SMSF Trustee are necessary to amend the Investment Strategy accommodating the LRBA. Additionally, minutes of meetings involving the Bare Trustee are essential for the Trustee to accept trustee status and execute the Declaration of Trust.
In summary utilising a Bare Trust for SMSF borrowing and asset acquisition offers an effective investment strategy for Australians planning their retirement. Nevertheless, compliance with the Act, comprehensive documentation and seeking professional advice are fundamental steps to mitigate tax consequences and maximise the benefits of this arrangement.
As SMSFs continue to be attractive for individuals seeking greater control over their retirement savings, a deeper understanding of Bare Trusts and LRBAs will be increasingly critical for successful SMSF investments. By adhering to the rules and guidelines set by the Superannuation Industry (Supervision) Act and consulting with experts, SMSF Trustees can make informed decisions to safeguard and grow their retirement wealth.
This is not advice and we recommend consulting with your accountant and or solicitor before making decisions.