The bare trust structure confuses more SMSF trustees than almost any other aspect of property investment through super. After handling over 2,500 SMSF property transactions across Australia, our team has seen the same documentation errors appear repeatedly, often with expensive consequences. Understanding SMSF property legal documentation requirements before you sign anything can mean the difference between a compliant acquisition and an enforceable undertaking from the ATO.
What a Bare Trust Actually Does in SMSF Borrowing Conveyancing Rules
A bare trust is a simple legal arrangement where one party (the holding trustee) holds legal title to an asset on behalf of another party (the beneficiary). The holding trustee has no discretion over the asset. They hold it, and that is it. They cannot sell it, lease it, or make decisions about it without instruction from the beneficiary.
In SMSF property transactions, the bare trust exists because of a quirk in how limited recourse borrowing arrangements (LRBAs) work under section 67A of the Superannuation Industry (Supervision) Act 1993. When your SMSF borrows to buy property, the property cannot be held directly by the SMSF trustee until the loan is fully repaid. Instead, a separate holding trustee must hold legal title.
This creates a two-layer structure. Your SMSF trustee is the beneficiary of the bare trust and has beneficial ownership of the property. The holding trustee (often called a custodian or security trustee) holds legal title. Once the loan is paid off, the holding trustee often transfers legal title to the SMSF trustee, though assets can remain in a bare trust after loan repayment subject to specific conditions and professional guidance.
In our experience roughly 5% of trustees who come to us have previously received incorrect advice about whether they even need a bare trust. Some have been told they can hold property directly while borrowing. In our observations, this is generally incorrect, and the consequences can include the entire borrowing arrangement being treated as non-compliant.
The Structure of SMSF Property Ownership
The SMSF property ownership structures for borrowing arrangements involve multiple parties with distinct roles. Understanding who does what prevents confusion during settlement and beyond.
The SMSF trustee sits at the top. If your fund has a corporate trustee (a company), that company is the SMSF trustee. If you have individual trustees, all members acting jointly form the SMSF trustee. The SMSF trustee makes all decisions about the property, collects rent, pays expenses, and directs the holding trustee.
The holding trustee holds bare legal title. This can be a company specifically established for this purpose (a special purpose company or SPC), or in some cases, an individual. Most practitioners recommend using a corporate holding trustee because companies have perpetual existence. If an individual holding trustee dies or becomes incapacitated, transferring the property becomes complicated and expensive.
The lender provides the borrowed funds and takes security over the property. Under LRBA rules, the lender's recourse is limited to the single acquirable asset held by the bare trust. They cannot chase other SMSF assets if the borrower defaults.
Who Should Be the Holding Trustee?
The ATO has released guidance indicating that the holding trustee must be a separate legal entity from the SMSF trustee. You cannot have the same company acting as both SMSF trustee and holding trustee for the same property.
For SMSFs with corporate trustees, the common approach is to establish a new company specifically to act as holding trustee. The directors of this company are typically the same as the SMSF trustee company directors, but the company itself is a distinct legal entity.
For SMSFs with individual trustees, options include establishing a company to act as holding trustee, or having a different individual (not one of the SMSF trustees) act as holding trustee. The individual trustee option creates succession issues and is generally discouraged.
SMSF Property Legal Documentation Requirements
Getting the documentation right requires attention to timing, content, and execution. Based on our transaction data, documentation errors cause settlement delays in a significant number of SMSF property purchases. The bare trust deed is the most frequently problematic document.
The Bare Trust Deed
This document establishes the bare trust relationship between the holding trustee and the SMSF trustee. It must clearly identify the property (or describe it if not yet acquired), name the parties, and set out the terms under which the holding trustee holds the property.
The deed should specify that the holding trustee holds the property solely for the benefit of the SMSF trustee, has no discretionary powers, and must act on the SMSF trustee's directions regarding the property. It should also address the eventual transfer of title to the SMSF trustee and what happens if the SMSF defaults.
A common error is using a generic bare trust deed not drafted for SMSF LRBAs. Standard commercial bare trust deeds may not include provisions required for SIS Act compliance. The ATO has indicated that the bare trust deed should clearly show the arrangement is a single acquirable asset holding for LRBA purposes.
The Loan Agreement
The loan agreement documents the borrowing arrangement. For bank loans, the lender provides this document. For related party loans (lending from a member or related party to the SMSF), the agreement must be carefully drafted to ensure it meets arm's length requirements.
While the ATO's PCG 2016/5 provides safe harbour terms for related party LRBA loans, compliance with these terms is not mandatory. The ATO states that non-compliance does not automatically deem an arrangement to be non-arm's length, as trustees can demonstrate arm's length terms by other means. These safe harbour guidelines suggest a uniform 70% maximum loan-to-value ratio for all real property, whether residential or commercial. The guidelines also specify a maximum loan term of 15 years for all real property investments.
The SMSF Trustee Resolutions
Before entering any LRBA, the SMSF trustee must formally resolve to proceed. These minutes should document that the trustee has considered whether the borrowing is in the best interests of members, that the investment strategy permits property investment and borrowing, and that the fund has adequate cash flow to service the loan.
The ATO's SMSF oversight data shows that inadequate trustee documentation remains a common audit issue. Resolutions should be detailed, not just a brief note saying "decided to buy property."
Timing Considerations in SMSF Borrowing Conveyancing Rules
The sequence of events matters enormously. Getting the order wrong can invalidate the entire arrangement.
Typically, the bare trust is established before the property is acquired. This means the bare trust deed should be signed before the contract of sale is executed, or at the very latest, before settlement. The holding trustee (not the SMSF trustee) must be the purchaser named on the contract.
The loan documentation must be in place before settlement. The lender needs to have approved the loan, and the loan agreement must be signed by all parties before funds are drawn.
During peak property settlement periods, these timing requirements create pressure. Conveyancers unfamiliar with SMSF transactions sometimes rush documentation or get the sequence wrong. We have seen transactions where the SMSF trustee was incorrectly named as purchaser, requiring costly deed of assignment arrangements to fix.
The Single Acquirable Asset Rule
The SIS Act generally requires that each LRBA only be used to acquire a single acquirable asset. A bare trust holding property under an LRBA cannot hold any other assets. If you want to buy two properties using borrowed funds, you need two separate LRBAs, two separate bare trusts, and two separate holding trustees (or the same holding trustee acting in different capacities).
Understanding what constitutes a single acquirable asset is essential for compliance. Generally, this refers to one property on one title. Multiple lots on separate titles, even if purchased together, typically require separate arrangements. Strata titled properties where you are buying multiple units present particular complexity.
The single acquirable asset rule also affects improvements. Under current ATO guidance, borrowed funds cannot be used to improve an asset held under an LRBA. If your SMSF borrows to buy a property, then wants to renovate it, the renovation funds must come from other SMSF resources, not additional borrowing secured against that property.
What Happens When Things Go Wrong
Non-compliant LRBAs can result in the entire borrowing arrangement being treated as a prohibited transaction. The consequences can include the fund being taxed at 45% on its assessable income plus the value of certain assets, which is a much broader impact than just taxing the borrowed amount. This can also lead to the potential loss of the fund's complying status and penalties for the trustees.
ATO research on SMSF issues indicates that property-related compliance failures are among the most common serious contraventions. Many of these relate to documentation deficiencies rather than deliberate non-compliance.
The legal and tax differences between SMSF and personal property purchases catch many trustees off guard. What works for a personal property purchase often fails to meet SMSF requirements.
Practical Considerations for Trustees
Before proceeding with an SMSF property purchase using borrowed funds, trustees should ensure several things are in place.
The fund's trust deed must permit borrowing. Older SMSF trust deeds may not include adequate borrowing powers. A deed amendment may be required before the LRBA can proceed.
The investment strategy must support property investment and borrowing. The strategy should address concentration risk (property may represent a large portion of fund assets), liquidity (property is illiquid), and how the fund will meet expenses during vacancies.
Cash flow modelling should demonstrate the fund can service the loan under various scenarios, including interest rate increases, extended vacancies, and reduced contributions. Funds that stretch to purchase property often face compliance issues later when they cannot meet expenses.
Professional advice from an accountant, financial planner, and SMSF specialist conveyancer should be obtained before signing any contracts. The cost of proper advice is minor compared to the cost of fixing a non-compliant arrangement.
Getting the Structure Right From the Start
SMSF property acquisitions using borrowed funds require careful attention to structure and documentation. The bare trust arrangement, while conceptually simple, involves multiple documents that must work together and be executed in the correct sequence.
Trustees considering this strategy should seek professional guidance specific to their circumstances. The regulatory requirements are detailed, and the consequences of getting them wrong are severe. An experienced SMSF conveyancing practitioner can coordinate the documentation requirements and ensure the transaction settles correctly.
If you are considering purchasing property through your SMSF using borrowed funds, contact our team to discuss your specific situation. We can review your proposed structure and documentation to identify any potential issues before they become problems.
