What is a Bare Trust? A Guide for Property Investors Using Their SMSF

With rising property prices and increasing interest in using superannuation funds to invest, many investors are asking: What is a bare trust, and do I need one?

If you’re thinking about buying property through your SMSF and borrowing to do it, chances are you’ll need a bare trust arrangement to stay compliant and protect your fund. In this guide, we’ll break down everything you need to know about bare trusts — in plain English — and how they help you invest using your super.

What is a Bare Trust?

A bare trust is a legal arrangement where a trustee holds an asset (such as a property) on behalf of a specifically identified beneficiary — in this case, your superannuation fund. It’s the simplest form of trust, with no discretionary powers.

In a bare trust:

• The legal title to the property is held by the bare trustee
• The beneficial ownership lies with the SMSF
• The trustee can only act on the beneficiary’s instructions
• No other trust assets can be held in the structure

This structure is commonly used in SMSF property investment under a Limited Recourse Borrowing Arrangement (LRBA) — a special setup that allows your SMSF to borrow money to purchase property.

Why are Bare Trusts Required for SMSF Borrowing?

Super funds are tightly regulated. To maintain compliance when borrowing, your SMSF cannot hold the legal title to a property directly while there’s an outstanding loan.

Instead, the property is held in a bare trust arrangement, which:

• Limits the lender’s recourse to only the asset held in trust
• Ensures the SMSF maintains beneficial interest
• Keeps the investment separate and identifiable
• Protects other SMSF assets from liability

This setup creates a clear distinction between the trustee’s role as legal titleholder and the beneficial owner, your fund.

Key Terms Explained

Let’s look at some of the legal and tax concepts you’ll hear when setting up a bare trust:

Term

Meaning

Trustee

The legal owner who holds the asset on behalf of the SMSF

Trust Deed / Bare Trust Deed

The legal document that outlines the trustee’s limited obligations and powers

Beneficial Owner

The SMSF that receives the benefits of the property (e.g. rental income, capital gains)

Legal Title vs Beneficial Ownership

One entity legally owns the property (the trustee), another benefits from it (the fund)

Who are the Parties Involved?

There are typically three parties in a typical SMSF bare trust arrangement:

1. The SMSF Trustee – this is the perosn who makes the investment decision and receives all the benefits.
2. The Bare Trustee – a separate entity (usually a corporate trustee) which holds the legal title on behalf of the SMSF.
3. The Lender – typically a bank or private lender that finances the purchase.

How is a Bare Trust Established?

Here’s a step-by-step breakdown of how a bare trust is set up for SMSF property purchases:

1. Create an SMSF, if you haven’t already.
2. Select a property you want to purchase.
3. Establish a bare trust deed with a separate trustee entity.
4. Ensure that the trustee is not the same as your SMSF trustee.
5. Apply for finance under a Limited Recourse Borrowing Arrangement (LRBA).
6. Purchase the property in the name of the bare trustee.
7. Ensure that all legal documents — including the trust deed, loan agreement, and purchase contract — comply with super laws.

It’s critical that the trust is established before the contract is signed, or it may result in compliance breaches and tax issues.

What Happens After the Loan is Repaid?

Once your SMSF pays off the loan in full:

• The legal title can be transferred from the bare trustee to the SMSF trustee.
• There are generally no Capital Gains Tax (CGT) consequences on this transfer.
• The trust arrangement effectively ends, and the SMSF becomes both the legal and beneficial owner.

Tax Implications and Asset Protection

Though bare trusts offer minimal asset protection by themselves (since they’re not discretionary), they’re still important tools for:

• Isolating risk under an LRBA
• Keeping ownership and control within your super
• Avoiding income tax complications by ensuring the SMSF is treated as the beneficial owner

Because the SMSF is entitled to all income and capital gains from the investment, the normal tax advantages of superannuation — such as 15% income tax and potentially 0% tax in retirement — still apply.

Common Mistakes to Avoid

Purchasing property in your super is dangerous without the proper professional guidance, which is why you should always consult with an SMSF specialist accountant. If you are looking at buying property in your super but don't currently have an accountant who specialises in super, reach out to our sister company Causbrooks today and we can put you in touch with one of their SMSF accountants.

These are some of the mistakes a good SMSF accountant can help you avoid:

• Signing a property contract before establishing the bare trust deed
• Using the wrong entity as trustee
• Failing to lodge the correct legal documents
• Mixing assets or using the trust for anything other than the specific property
• Not understanding your responsibilities under superannuation law

Final Thoughts

A bare trust is a vital structure when using your super to invest in property through a loan. While it may sound complex, when set up properly, it allows your SMSF to stay compliant, access leverage, and enjoy the long-term tax advantages of property investment — all while protecting your fund’s other assets.

Want to set up a compliant bare trust for your SMSF investment?

Book a free strategy session with Causbrooks Finance and let our team guide you from start to settlement.