SMSFs warned on common mistakes with bare trusts

A specialist law firm has highlighted the importance of ensuring that the bare trust has been set up correctly where SMSFs are looking to borrow money.

In a recent video, Cooper Grace Ward Lawyers senior associate Keeghan Silcock said that in order for an SMSF to borrow through a limited recourse borrowing trust — more commonly known as a bare trust — it is vital that the the bare trust has been established correctly from the outset.

“This includes providing the SMSF the beneficial interest in the asset that’s being acquired by the bare trust using borrowed money,” said Ms Silcock.

“It also means allowing the SMSF the right to acquire the asset from the bare trust after one or more payments have been made.”

Ms Silcock said her firm often sees inappropriate provisions being included in the terms for the bare trust.

“Another common mistake is that an SMSF may sign a contract to acquire an asset before the bare trust has been established correctly. This can cause duty issues in certain jurisdictions,” she warned.

It is also important to understand when an SMSF can use a limited recourse borrowing trust, she said.

This will depend on the asset that the SMSF is looking to acquire using borrowed money.

“A limited recourse borrowing trust can only be used to acquire one single asset. So, if your SMSF is wanting to acquire multiple different assets, unless a certain exemption applies, then you’ll need to establish different bare trusts for each of those different assets,” she explained.

“There are also restrictions on the changes or improvements that can be made to an asset while it is owned by a bare trust. So, if the SMSF was wanting, for example, to construct a property or significantly renovate a property, then you could not use a bare trust in that circumstance.”

Miranda Brownlee
25 July 2022
smsfadviser.com