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What is a Bare Trust and Why Your SMSF Needs One to Buy Property

  • Writer: My Finance Agent
    My Finance Agent
  • 4 days ago
  • 5 min read

If you’re planning to invest in property through your Self-Managed Super Fund (SMSF) and intend to borrow money, you’ll need a very specific legal structure in place: a bare trust.

 

This blog will walk you through what a bare trust is, how it fits into SMSF lending, why each property requires its own trust, and how a Limited Recourse Borrowing Arrangement (LRBA) works. It's essential knowledge for any SMSF investor using a loan to buy property.

 

Hands holding a cardboard sign with the word 'Trust' representing the bare trust concept in SMSF lending
🛡️ A bare trust is a legal structure that holds property title during an SMSF loan, providing asset protection and compliance with superannuation laws.

First, the Basics: What is a Trust?

To understand bare trusts, let’s quickly define the key terms:

 

🔹 Trust

A trust is a legal arrangement where one party holds property or assets for the benefit of another.

 

🔹 Trustee

The trustee is the legal owner of the asset. Their job is to hold or manage the asset according to the terms of the trust (trust deed).

 

🔹 Beneficiary

The beneficiary is the person or entity who ultimately owns or benefits from the asset—even if their name isn’t on the title.

 

🔹Trust deed

An outline of the rules that the trustee must follow when making decisions for the trust

 


SMSF Trusts:

An SMSF is itself a trust. Its purpose is to grow wealth for retirement.  Since you are making decisions what your fund is investing in, you are a trustee of the SMSF trust.  You must follow the rules outlined in the trust deed when making any investment decisions for the SMSF trust.

 

When the SMSF trust borrows money to buy a property, it must use a bare trust to hold the property until the loan is repaid. In this case, the SMSF is the beneficiary. The bare trust is just a legal shell to hold the title on its behalf.

 

 

What Is a Bare Trust?

 

A bare trust is a legal structure where the trustee holds the title to the property, but has no control or discretion over it. The SMSF is the beneficial owner, meaning it gets the rent, pays the expenses, and gains from the property's growth

 

  • The bare trust is legally required if the SMSF borrows to buy the property

 

Think of the bare trust like an empty legal shell (thus the name "bare") that temporarily holds the title while the SMSF pays off the mortgage.

 

Diagram showing the flow of funds between SMSF, bare trust, lender, and investment property under an LRBA structure
💡 This diagram illustrates how funds flow through an SMSF property purchase using a bare trust and Limited Recourse Borrowing Arrangement (LRBA), with rent and loan repayments clearly separated.

 

Every Property in a SMSF with a Mortgage Needs Its Own Bare Trust

 

This is a key rule that trips people up: if you want to buy another SMSF investment property using a loan, you’ll need a new bare trust.

 

Why? Because the law requires that for any borrowing, it needs to be for a “single acquirable asset.” That means:

 

  • You can’t bundle multiple properties into one trust

  • You can’t cross-collateralise properties in an SMSF - each loan stands on its own.

  • You must set up the bare trust before signing the purchase contract.

 

👉 This is why SMSF investors need to plan carefully before buying. A new loan means a new trust deed, trustee setup (for first purchase and optional for additional purchases), and legal documentation.

 


What's the purpose of the bare trust?

Since the bare trust is like an empty legal shell (even though you can manage the trust, you cannot do anything with the property in the trust), a lot of investors wonder- what's the point of it? The main reason for having the bare trust is to be able to enter into a Limited Recourse Borrowing Arrangement (LRBA).

 

LRBA is required when you want your SMSF to borrow money to purchase a property.

 

Key Features:

  • The SMSF is the borrower, but the property is held in a bare trust until the loan is repaid.

  • If the SMSF defaults, the lender can only repossess the property held in the bare trust.

  • The lender cannot access any other SMSF assets—that’s the “limited recourse” part.

  • This structure protects your retirement savings while allowing you to grow your portfolio

 

Once the loan is repaid in full, legal title is transferred from the bare trustee to the SMSF trustee, and the bare trust is no longer needed.



Why Bare Trusts Are Essential for SMSF Borrowing

 

If your SMSF enters into a borrowing arrangement for a property without setting up a bare trust:

  • You’ll be in breach of superannuation laws

  • The loan could be invalid

  • Your fund may be disqualified or penalised

  • You may face tax consequences

This is why it’s so important to set up the bare trust before signing the purchase contract.

 

lowchart showing SMSF corporate trustee, bare trust, and investment property structure under an LRBA
🔍 This flowchart shows the relationship between SMSF members, corporate trustees, bare trust custodians, and property loans under a Limited Recourse Borrowing Arrangement (LRBA).


Frequently Asked Questions (FAQs)

 

❓ Do I need a separate bare trust for each SMSF property loan?

Yes. Each property purchased with borrowed funds requires its own bare trust, separate loan, and unique trust deed. The SIS Act only allows borrowing for a “single acquirable asset.”

 


❓ Can my SMSF receive rental income from a property held in a bare trust?

Yes. Although the property is held in the name of the bare trustee, all rental income goes directly to your SMSF, as it is the beneficial owner.

 


❓ Can I be a director of both the trustee of the bare trust and the trustee of the SMSF?

Yes, you can but only if you act in two separate legal roles. It is common for the same person or company to be involved in both trustee roles, as long as the legal entities are distinct. For example:

  • You might be a director of a company that acts as the bare trustee, and

  • Also be a trustee (or director of the corporate trustee) of your SMSF

What you cannot do is be the same entity acting as both the bare trustee and the beneficiary (SMSF). That would collapse the trust.



❓ Can I (Personally) be both the trustee and the beneficiary of a bare trust?

No. You cannot be both the sole trustee and sole beneficiary—that would eliminate the legal separation required for the trust to exist. In SMSF structures, the SMSF is the beneficiary, and the bare trustee is a separate entity (often a company).

 


❓ What happens to the bare trust once the loan is repaid?

Once the loan is fully paid off, the legal title to the property is transferred from the bare trustee to the SMSF trustee. The bare trust is then wound up, as it’s no longer needed. 



❓ What is a "single acquirable asset"?

This term refers to one property or asset purchased under an LRBA. You can’t use one loan or bare trust to buy multiple properties or split assets. Each SMSF loan must be tied to a single, clearly identifiable asset.



DISCOVER MORE >



Need Help Setting Up a Bare Trust?

 

At My Finance Agent, we work with experienced legal and tax professionals to make SMSF borrowing smooth, compliant, and stress-free. From bare trust setup to lender selection, we’re with you every step of the way.

 

✔️ We coordinate with your SMSF administrator and solicitor

✔️ We source SMSF-compliant lenders and loan products

✔️ We support you post-settlement with annual mortgage reviews


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