What is a bare trust and why do you need one?

Why does a bare trust exist?

Superannuation law has a strict rule: super funds cannot borrow money to buy assets directly. An SMSF can only borrow under a specific structure called a Limited Recourse Borrowing Arrangement (LRBA). The bare trust (also called a custodian trust) is the legal vehicle that makes this possible, which is why every SMSF property loan requires one.

In simple terms: while you're paying off the loan, the property is technically held by the bare trust, not your SMSF directly. Once the loan is fully repaid, the property transfers into your SMSF. The bare trust then closes.

How does it protect you?

The "limited recourse" part of the borrowing arrangement is the key protection. If your SMSF defaults on the loan, the lender can only take the property held in the bare trust. They cannot touch any other assets in your super fund: your shares, cash and other investments are all protected.

Without this structure, a default could wipe out your entire retirement savings. The bare trust prevents that.

What does setting up a bare trust involve?

• 1A solicitor prepares a bare trust deed that establishes the holding trust.
• 2A separate trustee, usually a company, is appointed to act as the bare trustee.
• 3The property is purchased in the name of the bare trustee on behalf of your SMSF.
• 4The bare trust remains in place while the SMSF loan is outstanding.
• 5Once the loan is repaid, legal ownership can usually be transferred from the bare trustee to the SMSF trustee, subject to the trust structure and applicable state rules.

How much does it cost?

Bare trust setup typically costs $1,500 to $3,000 in legal fees, depending on the complexity and your solicitor. If a corporate trustee company needs to be established, add another $800 to $1,500. These are one-off setup costs, and the trust itself has minimal ongoing costs.

We work with your accounting and legal teams as part of the loan process. If you don't have one, we can recommend specialists who know exactly what lenders require.

Do I need to do anything once it's set up?

Not much. The bare trust simply holds legal title to the property while your SMSF loan is in place. Your accountant and auditor will take care of the annual reporting requirements as part of your SMSF compliance.

When the loan has been repaid, we'll work with your solicitor and accountant to arrange the transfer of legal title to the SMSF trustee (where applicable) and finalise the bare trust. We'll guide you through the entire process.