Bare Trusts & Property Investment: A Guide for SMSF Investors

Did you know that your Self-Managed Super Fund (SMSF) can borrow money to invest in property? It’s true! However, before diving in, it’s important to understand the key aspects of this process.

The most critical step in purchasing property through your SMSF is to consult with your accountant and solicitor to ensure all the necessary paperwork is completed before making an offer on any property. Legal paperwork can take time to prepare, so don't leave it to the last minute! Plus, rules vary between states and territories, which could affect how your contract is drafted.

The best approach? As soon as you start thinking about property investment, schedule an appointment with an expert like Jessica to discuss what you need to do.

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What is a Bare Trust?

In order to borrow money through your SMSF for property investment, you’ll need to set up a Bare Trust. But what exactly is it?

Under superannuation legislation, SMSFs are not allowed to borrow money directly. Instead, they can do so through a Limited Recourse Borrowing Arrangement (LRBA). An LRBA allows your SMSF to borrow money for the purchase of a single asset, typically real estate.

Here’s how it works:

The borrowed funds must be used to purchase a single asset.
The asset is held on trust for the SMSF in a Bare Trust.
Once the loan is fully paid off, the SMSF becomes the legal owner of the asset.
In the event of a loan default, the lender can only claim rights to the asset purchased and cannot touch any other SMSF assets.

So, a Bare Trust is a simple trust structure that holds a specific property, such as real estate, on behalf of the SMSF.

Setting Up a Bare Trust

When your SMSF borrows money to buy property, a Bare Trust must be set up to hold the property until the loan is fully paid off. While the Bare Trust holds the title of the property, it does not technically "own" the asset—the SMSF does, once the loan is paid in full.

Cost of Setting Up a Bare Trust:

A Bare Trust is currently priced at $2000 + GST, and the setup process takes 5 working days.

The Process of Borrowing to Buy an SMSF Investment Property

Here’s a step-by-step breakdown of the process involved in borrowing to purchase property through your SMSF:

The SMSF pays the deposit to the property vendor.
The SMSF borrows funds from a lender.
The SMSF pays the balance of the purchase price to the vendor (including stamp duty if applicable).
The vendor transfers the property to the Bare Trust, which is registered as the legal owner of the asset.
The lender registers a mortgage over the property.
The SMSF repays the loan according to the agreed timeline.
Once the loan is paid off, the asset is formally transferred to the SMSF. The Bare Trust can then be dissolved. This is a formal transfer requiring the SMSF trustee to be registered as the new property owner with the Titles Office. Generally, this transfer is exempt from duty, though specifics vary by state or territory.

Important Things to Know

A Bare Trust can only hold one asset at a time. If your SMSF buys additional properties, you’ll need a separate Bare Trust for each one.
If the SMSF defaults on the loan, the lender can only enforce its rights against the asset in the Bare Trust, and cannot touch other assets held by the SMSF.

Ready to Take the Next Step? ?

If you’re excited about building your wealth through SMSF property investment and want a tailored strategy, I’m here to help guide you every step of the way. Book a one-on-one Property Investment Initial Consultation with me today, and let’s make your SMSF property investment goals a reality.

? Book Your Appointment Here

Please note: This is general information. To ensure you're claiming all eligible costs correctly and staying compliant, we highly recommend booking an appointment with your SMSF accountant.

Bare Trusts & Property Investment: A Guide for SMSF Investors

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