Avoid bare trust mistakes
SMSF Tax Factsheet
Australians are increasingly setting
up their SMSFs to hold investment
properties under limited recourse
borrowing arrangements (“LRBA”).
Typically theses are set up using bare
trusts and while that may be a preferred
way to do so, there are some basic
mistakes that can lead to consequences
for the fund.
The key to avoiding the pitfalls? Get advice early, set up your
SMSF properly and know your obligations for borrowing
within an SMSF.
What is a bare trust?
Bare trusts are often employed where it is necessary to
conceal the true owner or purchaser of the property (e.g.
shares, land, businesses, etc) which is to become the subject
of the bare trust.
The bare trustee holds the legal ownership of the subject
property for the express and absolute benefit of the true
owner but the bare trustee has neither power or discretion
as to the trust property and nor active role in administering
the trust property.
Borrowing to fund investment property in your
SMSF
SMSF regulations require that any property acquired with
security (e.g. a mortgage) in place should be held in a
holding trust, with the SMSF as the main beneficiary of the
trust.
The SMSF will receive any rental income from tenants and
pay interest to the lender. Once the loan is repaid, the legal
ownership will be transferred to the trustee of the SMSF.
For property investment, the bare trust is simply the
registered holder of the property until the loan is repaid.
Typically, a bare trust is set up for each title on the property
you intend to use for investment purposes and which has
security against it from a lender.
Where are mistakes made?
While on the surface of it, a bare trust looks straightforward,
there are often mistakes made in the set up and operation
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of a bare trust, particularly where there is a Limited Recourse
Borrowing Arrangement in place.
We’ve outlined the key ones below that you should seek
advice on before embarking on adding property to your
SMSF:
Getting advice too late: Many people buying property
for their SMSF often buy first and seek advice later. The
downside is that they often do not understand the rules and
requirements of owning property within an SMSF, which can
create problems and costs (e.g. stamp duty) when it comes
to selling the property or managing income, expenses and
other SMSF compliance issues down the track.
Individual or corporate trustee: Our recent factsheet on
the type of trustee required for your SMSF outlines the pros
and cons of each type of trustee. Getting this right early
ensures you can protect your investments properly from the
outset.
Borrowing with little or no deposit: Borrowing to fund a
property within your SMSF requires that you set up a formal
arrangement for any security on the property.
Equally while many people may understand the concept
of negative gearing, many don’t understand that it
doesn’t work effectively in a low tax environment such as
superannuation.
Property title: Investment properties purchased under a
LRBA usually require separate titles for each property or title
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Avoid bare trust mistakes
SMSF Tax Factsheet
if they have the potential to be sold separately e.g. if an
apartment and car space are on separate titles.
Use borrowings properly: Often trustees don’t understand
that borrowings in an SMSF can’t be used in the same way
finance can be used personally or in a family trust.
Trustees must understand that any borrowings must be used
for purchasing a new property, not renovating properties
in their super funds. Properties held in LBRA can not be
significantly changed nor can the cost of doing so be used as
a tax deduction.
Income, expenses & deductions: The bare trustee
should hold the title of the property and nothing else; any
rental income, GST payments, land tax and other costs are
made and received by the fund trustee, thus there is no
requirement for separate bank accounts for the bare trust.
All expenses and deductions claimed for the investment
property should be included as part of the SMSF’s annual tax
return, rather than submitting a return for the bare trust.
A key advantage of the bare trust is that it is not a reportable
entity and does not require an ABN or TFN.
Separate the lender from the bare trustee: It’s not
advisable that the lender act as the bare trustee in a bare
trust for several reasons.
The main one is that there is the potential for conflict
between the rights over the property and the obligations a
bare trustee has to report appropriately.
Getting an accountant’s perspective
Establishing your SMSF with the right structure for your
circumstances is not necessarily straightforward and talking
to your accountant about your intentions is a good start to
getting it right.
Contact us on 02 9957 4033 for more information.
Contact Us
Disclaimer
Bates Cosgrave Chartered Accountants
Ground Floor, 123 Walker Street, North Sydney NSW 2060
PO Box 497 North Sydney NSW 2059
Last updated October 2014. The material and contents provided in this publication
are informative in nature only. It is not intended to be advice and you should not
act specifically on the basis of this information alone.
Tel: 02 9957 4033 Fax: 02 9964 0610 Email: [email protected]
Web: www.batescosgrave.com.au
If expert assistance is required, professional advice should be obtained. Please
contact us on 02 9957 4033 to discuss your specific circumstances.
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