Setting up a Bare Trust for your SMSF is a crucial step when purchasing property through your self-managed super fund using limited recourse borrowing arrangements (LRBAs). Done correctly, it ensures compliance with Australian superannuation laws and provides a clear legal structure. Done incorrectly, however, it can lead to costly delays, compliance breaches, and even penalties from the ATO.
At autoSMSF, we specialise in SMSF Setup and ongoing compliance. We’ve helped hundreds of trustees across Australia navigate the complexities of SMSF borrowing structures. Here are the top mistakes to avoid when setting up a Bare Trust for your SMSF, along with tips to get it right the first time.
1. Incorrect Structure of the Bare Trust
The most common—and often the most serious—mistake is setting up the Bare Trust incorrectly. Depending on the state in which the property is located, the Bare Trust may need to be established before, at the time of, or shortly after the property is purchased. It must be structured so that the SMSF is the beneficial owner, while the bare trustee holds the legal title until the loan is repaid.
What to do instead:
- Engage an SMSF accountant experienced in SMSF Trust Deeds.
- Ensure the Bare Trust deed complies with Superannuation Industry (Supervision) (SIS) regulations.
- Verify that the trustee of the SMSF and the trustee of the Bare Trust are not the same legal entity.
2. Using the Same Trustee for the SMSF and the Bare Trust
Using the same individual or corporate trustee for both the SMSF and the Bare Trust is a clear breach of LRBA rules and can invalidate the borrowing arrangement altogether.
What to do instead:
- Set up a separate corporate trustee for the Bare Trust.
- Double-check with your SMSF Accountants that trustee roles are clearly separated.
3. Incorrect Name on the Property Title
Another major pitfall is registering the wrong name on the property title. The title must be in the name of the bare trustee, not the SMSF itself.
Why it matters:
- Registering the property incorrectly can trigger stamp duty twice—once on purchase and again on correction.
- It can also raise red flags with the ATO or your lender.
What to do instead:
- Before signing any contract, confirm the correct legal names with your legal advisor or SMSF accountant.
4. Not Having a Compliant SMSF Trust Deed
Your SMSF Trust Deed must explicitly allow for borrowing and holding assets through a Bare Trust. If the deed is outdated or silent on these provisions, the entire borrowing arrangement could be invalid.
What to do instead:
- Review and update your SMSF Trust Deed before setting up a Bare Trust or entering into any borrowing arrangement.
- Work with a provider who understands the legal intricacies and ensures compliance with ATO.
5. Signing Contracts in the Wrong Name
When purchasing property, many trustees mistakenly sign contracts in the name of the SMSF instead of the Bare Trustee. This simple error can unravel the whole deal.
What to do instead:
- Ensure that contracts are signed by the bare trustee on behalf of the SMSF.
6. Failing to Set Up the Bare Trust Before Signing the Contract
Timing is everything. In some states, if you sign a property contract before the Bare Trust is established, the purchase may be considered as having been made directly by the SMSF, which would breach LRBA compliance rules.
What to do instead:
- Set up the Bare Trust before with the correct date.
- Consult your SMSF accountant to ensure everything is in place beforehand.
7. DIY Bare Trust Setup Without Professional Advice
Many trustees attempt to cut costs by using generic online templates or DIY legal kits to set up a Bare Trust. Unfortunately, this often leads to errors that could cost more in the long run, especially if stamp duty or compliance issues arise.
What to do instead:
- Engage SMSF accountants who have experience with property purchases through SMSFs.
- Consider firms like autoSMSF, who specialise in end-to-end SMSF property compliance.
8. Overlooking Stamp Duty Concessions and Implications
If the Bare Trust is not structured properly, or if the wrong entity signs the contract, you may miss out on stamp duty concessions. In worst cases, you could end up paying stamp duty twice.
What to do instead:
- Work with professionals who understand the requirements in your specific state or territory.
- Ask for a pre-purchase review to avoid costly errors.
9. Not Registering the Bare Trust for Tax or Compliance
While a Bare Trust typically doesn’t lodge tax returns, it must still be accounted for correctly. This includes maintaining proper financial records and ensuring the arrangement is reflected in the SMSF’s financial statements.
What to do instead:
- Keep clear records of all Bare Trust transactions.
- Ensure your SMSF auditor reviews and signs off on the arrangement each year.
10. Failing to Communicate with Lenders Early
Lenders often have strict criteria around SMSF borrowing arrangements and Bare Trust structures. Miscommunication or a poorly prepared structure can result in your loan application being declined.
What to do instead:
- Engage your lender early in the process.
- Provide them with the Bare Trust deed, SMSF Trust Deed, and any supporting documents upfront.
Final Thoughts
Setting up a Bare Trust for your SMSF is not just a checkbox—it’s a legal and financial structure that must be established with precision. With so many moving parts—trustees, deeds, contracts, lenders, and stamp duty—it’s easy to make a misstep. But with the right professional support, you can navigate this process confidently and stay compliant.
At autoSMSF, we assist clients across Australia with tailored SMSF property solutions, and our team of SMSF accountants in Melbourne can help you every step of the way—from SMSF Setup and trust deeds to property purchase and compliance.
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