Should You Keep the Bare Trust After Buying Property in Your SMSF? Once an SMSF property loan is fully repaid, trustees often ask whether the bare trust is still required. While the original purpose of the bare trust is to satisfy limited recourse borrowing arrangement (LRBA) rules, its usefulness does not always end there. In […]
Should You Keep the Bare Trust After Buying Property in Your SMSF?
Once an SMSF property loan is fully repaid, trustees often ask whether the bare trust is still required. While the original purpose of the bare trust is to satisfy limited recourse borrowing arrangement (LRBA) rules, its usefulness does not always end there. In practice, the decision to keep or wind up the bare trust depends on cost, simplicity, tax outcomes, and future planning objectives. Therefore, trustees should review the structure carefully before making changes.
This article explains when retaining the bare trust makes sense, when it does not, and how to approach the decision correctly.
What Is a Bare Trust in an SMSF?
A bare trust (also known as a custodian or holding trust) is used when an SMSF borrows to acquire property. Under this arrangement, the bare trustee holds legal title, while the SMSF retains beneficial ownership.Importantly, the SMSF receives all rental income and pays all property expenses. The lender’s rights are limited solely to the property held in the trust. As a result, the SMSF remains economically exposed, even though it does not hold legal title during the loan term.
What Changes After the LRBA Is Repaid?
Once the loan is repaid in full, the legal obligation to maintain the bare trust ends. However, this does not automatically mean the trust must be wound up immediately.At this stage, trustees have two options. They can either transfer legal title to the SMSF trustee or leave the title where it is. Each approach has practical consequences, so timing and intent matter.
Ongoing Costs and Administration
Keeping the bare trust usually means accepting ongoing compliance costs. For example, where a corporate bare trustee exists, annual ASIC review fees continue to apply. In addition, some accountants charge higher fees for funds with holding trusts. This occurs because extra reconciliation, audit review, and documentation are often required. Over time, these costs can outweigh any perceived benefit of keeping the structure.
| Aspect | During LRBA | After LRBA Repaid |
|---|---|---|
| Legal owner of property | Bare trustee | Bare trustee (unless transferred) |
| Beneficial owner | SMSF | SMSF |
| Rental income | SMSF | SMSF |
| Property expenses | SMSF | SMSF |
| Borrowing compliance | Required | No longer required |
| Legal title transfer required | No | Optional (strategic decision) |
Benefits of Keeping the Bare Trust
Despite the costs, retaining the bare trust can still be appropriate in certain situations.
Administrative Segregation
Firstly, the structure can help keep property income and expenses clearly separated. This is particularly useful in multi-member SMSFs or funds with complex investments.
Strategic Flexibility
Secondly, trustees who plan to refinance, restructure, or adjust ownership arrangements may prefer not to rush a title transfer. In these cases, leaving the bare trust in place avoids unnecessary legal steps.
Estate Planning Timing
Finally, trustees sometimes retain the bare trust while updating estate planning documents. This allows control issues to be resolved first, rather than dealing with title changes prematurely.
Situations Where Retaining the Bare Trust May Be Useful
| Scenario | Why the Bare Trust May Be Kept |
|---|---|
| Multi-member SMSF | Clear segregation of property flows |
| Future refinancing considered | Avoids premature title changes |
| Complex investment mix | Easier tracking and audit narrative |
| Estate plan under review | Allows time to align control and succession |
Tax and CGT Considerations
Bare trust establishment costs are not immediately deductible. However, some costs may form part of the property’s CGT cost base, depending on their nature. Ongoing costs, such as accounting or ASIC fees, are generally treated as SMSF expenses. That said, deductibility depends on proper documentation and how the expense relates to the fund’s income.Because tax outcomes vary, trustees should always confirm treatment with their adviser.
Keep vs Wind Up: Practical Decision Matrix
| Factor | Keep Bare Trust (more likely) | Wind Up & Transfer Title (more likely) |
| You want minimal ongoing compliance | ❌ | ✅ |
| Corporate bare trustee exists with ASIC fees | ❌ | ✅ |
| You may refinance / restructure soon | ✅ | ❌ (or “not yet”) |
| You’re selling within 12–24 months | “Maybe” | ✅ often preferred |
| You are simplifying for retirement/pension phase | ❌ | ✅ |
| You have multi-member complexity | ✅ sometimes | ✅ sometimes (depends on admin preference) |
| Your state duty process is unclear | ✅ (pause until clarified) | ✅ after advice and correct evidence |
Estate Planning Implications
From an estate planning perspective, the bare trust itself is rarely the main issue. Instead, control of the SMSF trustee and the validity of binding death benefit nominations are usually more important. That said, retaining the bare trust temporarily can assist while succession strategies are reviewed. For example, trustees may wish to align pension documentation, reversionary arrangements, or corporate trustee structures before transferring legal title.
When Winding Up the Bare Trust Makes Sense
In many cases, winding up the bare trust is the cleaner long-term option.
This approach is often preferred where trustees want to simplify compliance, reduce costs, or prepare the property for sale. Additionally, funds approaching pension phase frequently benefit from having assets held directly by the SMSF trustee.
However, title transfers must be handled carefully. State-based stamp duty concessions apply only when documentation and sequencing are correct.
Frequently Asked Questions
FAQs
Can the same bare trust be used for another property?
No, generally the holding trust is set up for a single acquirable asset. If acquiring another LRBA asset, you normally establish a new holding trust.
Does the bare trust lodge its own tax return?
Commonly, a “true” bare trust is treated as transparent and the SMSF reports income/expenses; however, real-world facts (e.g., TFN/ABN registrations, bank accounts, data-matching letters) can change what administration is prudent. Generally if the Bare Trust is receiving rental income from the SMSF property and pay all outgoings, then a seperate tax return for this trust is necessary
Will stamp duty apply when transferring legal title to the SMSF?
Often concessions/exemptions exist if structured correctly, but this is state-based and evidence-driven (NSW has detailed evidentiary requirements and this differs in other states).
Final Thoughts
Ultimately, keeping or winding up a bare trust is a strategic decision. While some trustees benefit from short-term flexibility, others gain more from simplicity and reduced compliance.
Therefore, the best approach is to review costs, future intentions, and estate planning objectives together. Doing so ensures the structure supports the SMSF rather than complicating it.
Links & Resources
- ATO: About LRBAs – Click here
- My SMSF / My SMSF Property – Click Here
- Revenue NSW: Section 62 evidentiary requirements – Click Here
- Revenue NSW: Section 62B overview note – Click Here
Disclaimer
This article is general information only and does not constitute financial, tax, or legal advice. SMSF trustees should seek professional advice before altering trust structures or transferring property titles.
