Business & Corporate: Borrowing under your SMSF? Establish a bare trust before you sign

The problem.

You see a property you want to purchase in your SMSF using borrowed funds and the agent wants you to sign a contract urgently !!  Should you sign it?   Answer: No, you must first establish a Bare Trust (sometimes called a Custodian Trust), secure finance and undertake pre exchange searches and enquiries. 

Trustees are prohibited from borrowing funds under the Superannuation Industry (Supervision) Act 1993 (Cth).  So how can you raise sufficient funds to purchase the property in your SMSF?

The solution: Limited Recourse Borrowing Arrangements (LRBAs)

The solution for a trustee in this position:

1. Enter into a Limited Recourse Borrowing Arrangement (LRBA). This arrangement contemplates the creation of a special purpose trust (Bare Trust).
2. The Bare Trust Trustee (a company) of that Trust will be the registered proprietor of the land.  
3. The SMSF Trustee borrows the money.
4. The lending bank's right of recovery (ie. its ability to ‘go after’ a particular asset to recover the money lent to the borrower) is limited to the asset acquired.
5. The other assets in the SMSF are protected and cannot be attacked by the lender.  

Some tips regarding LRBAs

1. First ensure the SMSF Trustee has power by the terms of the Trust Deed to borrow the purchase funds.
2. The Bare Trust Trustee must sign the contract for the purchase of land. If anyone else (including the corporate trustee of the SMSF) signs the contract double stamp duty may become payable.
3. In order to avoid future complications, ensure that the Bare Trust and corresponding corporate Bare Trust Trustee have been established before you contemplate signing a contract for the purchase of land.
4. The Bare Trust must be established for the purpose of acquiring 'single acquirable asset' only. It cannot hold more than one property. However, exceptions to this rule exist, such as where a factory has been built across two land titles.
5. All funds, including the initial deposit must only be sourced from the SMSF or from the borrowed funds.

If you are thinking about buying an investment property through your SMSF, please contact our Andrew Frank or shoot us an email today!

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Cover your assets with a trust

 Keywords: business & corporate, SMSF, bare trust, LRBA, superannuation, self-managed superannuation, property, investment

 This article is provided to the reader for general information. It is not legal advice. It was written by Zdenka Marinov & Emily Graham and edited by Andrew Frank.