Frequently asked questions on bare trust or custody trust

What is a bare trust or custody trust?

A bare trust or custody trust is a simplest form of trust in which the beneficiary has the absolute right to the trust’s assets and income. The trustee has no discretion and no active duties other than to distribute the asset to the named beneficiaries when instructed by them to do so.

When should I use a bare trust?

A bare trust is a commonly used structure through which an SMSF acquires a single asset in a limited recourse borrowing arrangement (LRBA).

A bare trust is also used to conceal the identity of the purchaser or the beneficiary, or to hold assets for children under 18 years old.

What are the key features of a bare trust?

The deed must be carefully drafted so that it is in full compliance with tax laws, the state laws and lender’s requirements.

A Bare Trust should clearly show:
•   That the sale of contract was between the vendor and the Bare Trustee as the apparent purchaser;
•   That all of the purchase money was provided by the beneficial owner and its lender and none by the Bare Trustee;
•   That the Bare Trustee is simply holding the property on trust;
•   The obligations of the Bare Trustee to only act on any request or direction from the beneficiary; and
•   Finally, in order not to incur transfer duty twice, the bare trust document was signed before the offer and acceptance was signed

What is the structure of a bare trust?

The Australian Taxation Office (ATO) requires the creation of a separate trust for the sole purpose of holding legal ownership of the purchased asset. This means:

•   A corporate SMSF is not allowed to use its existing corporation as a trustee., It must establish a new company to serve as the legal owner of the property.

•   This new company’s sole purpose is to hold the property and sign contracts and agreements related to it

•   The bare trustee may also be an individual, but individual trustee SMSFs should check the lender’s requirements before moving forward with an LRBA.

•   Most lenders prefer corporate trustees to ensure loan payment continuity, even during  circumstances that can disrupt SMSF activities in an individual trustee set up.

Who signs the contract of sale?

The Trustee of the Bare Trust is the entity that holds the legal title to the property on trust for the beneficiary. Therefore, it is the Bare Trustee that has to be noted as the purchaser of the property on the contract of sale.

When should the trust deed be dated?

The timing of dating the trust deed must be managed depending on the state you are in, to avoid double stamp duty – upon the purchase, the transfer of the property to the SMSF when the mortgage is paid off.

The following summarises when to date a bare trust for an SMSF property purchase:

NSW – After contract date
ACT – After contract date
VIC – After settlement
QLD – Before or on contract date
TAS – After contract date
SA – After contract date but before settlement
WA – After contract date
NT – Before contract date

Who pays the tax on the bare trust’s income?

The asset subject to the Bare Trust will always belongs to the beneficiary therefore any income tax associated tax matters will be linked back to the beneficiary. For example, each year, the rental income has to be declared by the beneficiary and not the trustee.

Can I have more than one property in a bare trust?

No. a bare trust is limited to a single asset per borrowing. This refers to a single “acquirable asset” or a collection of assets which are identical and hold the same market value. The in-house asset exemption for Limited Recourse Borrowing Arrangements (LRBAs) is dependent upon the asset being the only property of the bare trust.

What happens when the loan is fully paid off?

Once the loan is fully paid off, the Bare Trust and Custodian Trustee is no longer needed and you will need to advise the Titles Office and also make sure to update each party relating to the property investment to be in the name of the SMSF.

If the dating of the trust deed complies with the state’s requirements, there will be no stamp duty, only a transfer fee, which may vary between the states.

What if I don’t want to transfer the property to the SMSF?

If you prefer to keep the asset in the bare trust, you can simply leave a token amount in the loan to keep the loan active, and avoid the need to change the asset under the SMSF’s name.

How do I vest a  bare trust?

A bare trust does not ordinarily need to be “vested” because, technically, once the property transfers out the bare trust ceases to exist (i.e. there must be property held for that trust in order for the bare trust to exist). If, however, you would prefer a “formal document” to record the “vesting” of the trust, then please utilise our “Vesting of a Discretionary Trust” document form and add legal review (scoped) to your order – ensure that you specify your instructions for the solicitor in the Notes (i.e. to adjust the document so that it suits the vesting of a holding/bare trust) and attach a signed copy of the holding/bare Trust Deed.

Can a bare trust be re-used?

Our partnered legal provider recommends against amending a bare trust deed for another property and instead suggests establishing a new holding trust, unless the circumstances warrant an amendment (e.g. where a street address changes post registration of the plan, but there is no change in the property held).

Source: ATO, NSW Trustee & Guardian.