A Simple Guide to Setting Up a Bare Trust in Your SMSF

When I first started in the financial world more than 35 years ago, I quickly realised something: money matters often sound more complicated than they really are. People would sit across from me, eyes wide, saying, “Layla, I just don’t understand all this legal talk. Can’t someone explain it to me in plain English?”

One topic that still confuses many people today is the bare trust in an SMSF. If you’re thinking of using your Self-Managed Super Fund (SMSF) to buy property, you’ve probably already come across this term. And like many of my clients, you might be wondering, “What on earth is a bare trust, and do I really need one?”

The short answer is: yes, if your SMSF is borrowing money to buy property, you’ll need a bare trust. But don’t worry — it’s not as scary as it sounds. Let me break it down for you step by step, just like I’ve done for my clients over the past three decades.

What Is a Bare Trust?

Let’s start with the basics.

A bare trust (also called a property trust or holding trust) is a simple type of trust used when your SMSF takes out a loan to buy property.

Here’s how it works in plain words:

• The bare trustee (often a company you set up for this purpose) holds the property on behalf of the SMSF.

• The SMSF is the beneficial owner — meaning it gets the income and benefits from the property.

• Once the loan is fully repaid, legal ownership of the property can be transferred to the SMSF itself.

The key idea is that the property is kept separate from other SMSF assets while the loan exists. This protects the fund under the borrowing rules set by the Australian Tax Office (ATO).

Think of it like a safety container — the bare trust simply holds the property until the SMSF is ready to take it over fully.

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Why Do You Need a Bare Trust in Your SMSF?

Over the years, I’ve had many clients ask me, “Layla, why can’t the SMSF just buy the property directly?”

Here’s the reason:

When an SMSF borrows money to buy property, the ATO requires a Limited Recourse Borrowing Arrangement (LRBA). Under an LRBA:

• The lender’s rights are limited to the property itself.

• Other assets in your SMSF are protected if something goes wrong.

• To make this work, the property must be held in a separate trust — the bare trust.

Without a bare trust, you simply can’t borrow to buy property inside your SMSF. It’s that important.

Step-by-Step: How to Set Up a Bare Trust in Your SMSF

Now let’s get practical. Here’s the process, explained in simple steps.

Step 1: Set Up Your SMSF Properly

Before you even think about the trust, your SMSF needs to be legally established. That means:

• A trust deed for the SMSF.

• Appointing trustees (individuals or a corporate trustee).

• Registering with the ATO for an ABN and TFN.

• A dedicated bank account for the SMSF.

Step 2: Decide on the Property and Loan

Once the SMSF is set up, the trustees choose the property they want to buy and arrange the loan under an LRBA. At this stage, you’ll also need to decide how the bare trust will be structured.

Step 3: Create the Bare Trust

The bare trust needs its own trust deed, which sets out:

• Who the trustee is (often a company created just for this purpose).

• Who the beneficiary is (your SMSF).

• The property being held in trust.

Step 4: Register the Trustee

If you set up a corporate trustee for the bare trust, it must be registered with ASIC. This company will legally hold the property until the SMSF pays off the loan.

Step 5: Purchase the Property

The bare trustee signs the contract and holds the property in trust. However, the SMSF provides the deposit, pays the loan, and receives the rental income.

Step 6: Manage the Property

• Rent goes straight into the SMSF bank account.

• Loan repayments come from the SMSF.

• All property expenses (rates, insurance, repairs) are also paid by the SMSF.

Step 7: Transfer Ownership Once Loan Is Repaid

When the SMSF finally pays off the loan, the property can be transferred from the bare trust to the SMSF directly. By this point, the SMSF owns it outright.

A Real Example From My Experience

I’ll share the story of one of my clients — let’s call him Peter.

Peter ran a small plumbing business. For years, he rented a workshop and office space from someone else. Eventually, he asked me, “Layla, can I use my super to buy my own workshop?”

We set up an SMSF for Peter and his wife. The SMSF borrowed money to buy the workshop. To make that happen, we also created a bare trust, which legally held the property until the loan was repaid.

Every month, Peter’s business paid rent — but instead of paying a landlord, the rent went straight into his SMSF. Over the years, that property grew in value, the loan was cleared, and Peter ended up with a solid asset sitting inside his super for retirement.

The bare trust was crucial. Without it, the purchase wouldn’t have been possible.

The Benefits of a Bare Trust

Here are the key advantages I’ve seen clients enjoy:

• Compliance with the law: It allows the SMSF to borrow safely and legally.

• Asset protection: If something goes wrong with the loan, other SMSF assets are protected.

• Clear structure: Keeps the property separate while the loan is active.

• Future ownership: Once the loan is repaid, the SMSF takes full legal ownership.

The Challenges to Be Aware Of

Of course, it’s not all smooth sailing. Bare trusts also come with challenges:

• Setup costs: Creating the trust and company can be expensive.

• Complexity: The rules are strict, and mistakes can be costly.

• Limited flexibility: Once the trust is in place, you can’t refinance or change the property without major paperwork.

• Paperwork overload: Annual audits, legal documents, and compliance requirements can be overwhelming.

That’s why I always recommend getting professional help when setting one up.

My Tips After 35 Years

If I had to give just three pieces of advice to anyone considering a bare trust in their SMSF, they would be:

1. Plan carefully before acting – Make sure the property purchase fits into your overall retirement strategy.

2. Get the right advice early – Accountants, SMSF specialists, and legal professionals are worth their weight in gold here.

3. Think long-term – SMSF property is not a short-term play. You need patience and a clear vision for retirement.

Final Thoughts

At first glance, a bare trust can sound like one of those complicated financial structures designed only for experts. But in reality, it’s just a practical tool that makes SMSF property borrowing possible.

After 35 years of walking people through this process, I can tell you — once it’s explained in simple terms, most people breathe a sigh of relief and say, “Oh, that’s not so bad after all.”

So if you’re planning to use your SMSF to buy property with a loan, don’t be put off by the technical language. With the right support and a step-by-step approach, setting up a bare trust is not only possible — it’s often the key that unlocks a stronger retirement future.

And remember, you don’t have to do it alone. Just like Peter and countless others I’ve helped, you can make it work with patience, planning, and the right guidance.