Self-managed superannuation funds: Do I need a bare trust?
Are you thinking about buying an investment property through your self-managed superannuation fund with a mortgage?
There is one thing you need to know.
Before you can do this, you need to establish a bare trust to hold the property on behalf of your self-managed superannuation fund (SMSF).
In this blog, we explain why.
What is a bare trust?
A bare trust is where a trustee (i.e. someone who controls and makes decisions on behalf of a trust) holds an asset (i.e. real estate) for one or more beneficiaries (i.e. people who obtain income from the asset).
The trustee cannot do anything with the asset (i.e. sell it) unless the beneficiaries instruct them to.
How are bare trusts used by SMSFs to purchase property?
If you require a mortgage to buy an investment property through your SMSF, a bank or private lender will require you to set up a bare trust until the loan is paid off.
If the SMSF fails to repay the loan, the bank or private lender has the investment property in the bare trust as security. However, they cannot access any remaining assets that the SMSF has.
How do I set up a bare trust for a SMSF?
To establish a bare trust, the following steps should be undertaken:
Step 1: Locate the property that you want to purchase in your SMSF’s name.
Step 2: Schedule a meeting with your accountant. They will review the SMSF’s Trust Deed to determine whether your proposed purchase fits in with your SMSF’s investment strategy.
Step 3: Book in a consultation with your lawyer to confirm whether your SMSF can purchase the investment property. The lawyer will then draft a formal document called a Declaration of Trust which will set out the purpose behind the bare trust (i.e. to hold the investment property), who the beneficiaries are (i.e. you and your spouse) and how the bare trustee will manage the trust.
Step 4: Check your bank or private lender’s requirements on what they require from you in relation to your bare trust. Each institution will have different criteria.
How many properties can I have in a bare trust?
One. You need to set up a bare trust for every investment property that you buy through your SMSF.
Who receives the rental income for the investment property?
The good news is that your SMSF will receive any rental income and be able to claim negative gearing at the end of the financial year.
The bad news is that the SMSF will be required to meet all expenses for the property including mortgage repayments and utility bills.
If I have a bare trust in place, who signs the Contract for Sale of Land?
The trustee of the bare trust.
Takeaway
Prior to purchasing a property in your SMSF’s name, we highly recommend speaking to a lawyer so they can set up a bare trust on your behalf.
If you need any assistance with bare trusts or limited recourse borrowing arrangements, book in a 15-minute consultation with us here