What Is an SMSF Bare Trust?
If you have a self-managed super fund (SMSF) and want to borrow money to purchase an investment asset — particularly commercial or residential property — you will encounter a legal structure called a bare trust. Also referred to as a holding trust or custodian trust, the bare trust is not optional. It is a mandatory requirement under Australian superannuation law whenever an SMSF enters a Limited Recourse Borrowing Arrangement (LRBA).
This guide is written for business owners and professionals who already have an SMSF — or are considering setting one up — and want to understand exactly how the bare trust and LRBA structure works before taking the next step. We cover the legal mechanics, the practical setup process, costs, and the rules you absolutely cannot afford to break.
At Pinnacle Accounting & Advisory, we work with Melbourne business owners who use this structure to purchase their commercial premises inside their SMSF — one of the most powerful and legitimate wealth-building strategies available in Australia. But it only works when it is set up correctly. If you run a trading business, the same holding trust structure is central to buying your business premises through your SMSF.
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Why You Can’t Just Buy Property Directly in Your SMSF with Borrowed Money
The Superannuation Industry (Supervision) Act 1993 (SIS Act) contains a strict prohibition: SMSFs generally cannot borrow money. The rationale is simple — superannuation savings are protected retirement assets, and the government wants to prevent SMSFs from taking on debt that could erode members’ retirement balances.
However, Parliament recognised a narrow exception. Under section 67A of the SIS Act, SMSFs are permitted to enter a Limited Recourse Borrowing Arrangement. An LRBA allows the fund to borrow money from a lender (a bank or, in some cases, a related party such as a family member or associated entity) to purchase a single acquirable asset.
The critical condition — and the reason the bare trust exists — is this: the asset purchased with borrowed money cannot be held directly by the SMSF until the loan is fully repaid. The SMSF holds only the beneficial interest in the asset. Legal title must be held by a separate bare trustee. The bare trust is the legal vehicle that makes this possible. Without it, there is no LRBA, and therefore no legal mechanism for an SMSF to borrow at all.
How the Bare Trust Structure Works
Understanding the bare trust requires understanding the full flow of money and legal interests in an LRBA. Here is how it works from start to finish.
Step 1: The Loan
The SMSF borrows money from a lender. This can be a bank (most common for commercial and residential property) or a related party (such as a family member, family trust, or company associated with the SMSF members). Related-party loans must strictly comply with the ATO’s safe harbour terms under PCG 2016/5 — more on this in the compliance section below.
Step 2: The Bare Trustee Purchases the Asset
The loan proceeds flow to the bare trustee — a separate legal entity (almost always a corporate trustee — that is, a company set up specifically for this purpose) that purchases the asset on behalf of the SMSF. The contract of purchase is signed in the name of the bare trustee, not the SMSF trustee. The bare trustee holds legal title to the asset.
Step 3: The SMSF Holds Beneficial Interest
Although the bare trustee holds legal title, the SMSF is the beneficial owner of the asset. All economic benefits — rental income, capital growth — flow to the SMSF. The bare trustee has no active duties and no discretion; it simply holds the asset as directed by the SMSF trustee. The bare trust deed documents this relationship in full.
Step 4: The SMSF Repays the Loan
The SMSF (not the bare trustee) makes all loan repayments using money from its own resources — rental income, member contributions, or other fund assets. The lender’s recourse is limited to the asset held in the bare trust. If the SMSF defaults, the lender can seize and sell the asset in the bare trust, but they cannot touch other SMSF assets (a member’s other investments, cash, listed shares). This is the “limited recourse” in Limited Recourse Borrowing Arrangement.
Step 5: Loan Repaid — Asset Transferred to the SMSF
Once the loan is fully repaid, the asset is transferred from the bare trustee to the SMSF trustee. This is a significant legal step — it requires stamp duty in most states, legal documentation, and notification to the SMSF’s auditor. Some states have concessional stamp duty rates for SMSF property transfers, but this varies and must be confirmed with your solicitor.
Worked Example: Business Owner Buys the Business Premises
David runs a manufacturing business in Melbourne and currently rents a commercial premises for $80,000 per year. His SMSF has $350,000 in cash. He wants his SMSF to purchase the premises (valued at $1.2 million) rather than continuing to pay rent to a third party.
His solicitor and SMSF accountant structure it as follows: David’s SMSF borrows $850,000 from a bank (LRBA). A new company — “Property Holdings Pty Ltd as trustee for the XYZ Bare Trust” — is incorporated as the bare trustee. The bare trustee purchases the commercial property, with legal title in the bare trustee’s name. David’s business then pays $80,000 per year in market rent directly to the SMSF. The SMSF uses this rental income (plus David’s super contributions) to make loan repayments. Once the $850,000 loan is repaid, the property transfers into David’s SMSF outright — now a tax-sheltered asset in a fund that may be in pension phase (zero tax) by the time the loan is cleared.
Setting Up a Bare Trust: Step by Step
Setting up an LRBA and bare trust involves multiple professionals and several sequential steps. Here is the process in full.
- Step 1: Confirm the asset qualifies. The asset must be a “single acquirable asset” as defined by the SIS Act. A commercial property on a single title qualifies. Multiple lots or mixed-use assets can be more complicated — your solicitor must confirm the asset meets the single acquirable asset test before proceeding.
- Step 2: Obtain legal advice and commission the bare trust deed. The bare trust deed must be professionally drafted by a solicitor experienced in SMSF law. It formally documents the relationship between the bare trustee and the SMSF, and must be in place before any asset is purchased. Do not use generic online templates for this — SMSF bare trust deeds have specific requirements.
- Step 3: Incorporate the corporate bare trustee. A new company must be incorporated specifically to act as bare trustee. This company must be separate from the SMSF trustee company — it cannot be the same entity. ASIC charges a registration fee for the new company and indexes its fees each 1 July, so check the current amount on the ASIC fees page before you budget. Professional fees for the set-up sit on top.
- Step 4: Obtain an ABN and TFN for the bare trust if required. The bare trust may need its own ABN for GST purposes, particularly for commercial property. Your accountant will advise whether registration is required based on the asset type and rental income.
- Step 5: Arrange the LRBA. The SMSF trustee applies for the loan from the lender. The LRBA agreement must clearly document: the loan terms, the security (the asset held in bare trust), and the limited recourse nature of the loan. For related-party LRBAs, the terms must match ATO safe harbour rates under PCG 2016/5.
- Step 6: The bare trustee signs the purchase contract. The contract of sale is executed in the name of the bare trustee — for example, “ABC Holdings Pty Ltd ATF the XYZ Bare Trust.” The SMSF trustee’s name must not appear as the purchaser.
- Step 7: Open a separate bank account for the bare trust. The ATO expects that the bare trust’s financial transactions (particularly rental income and loan repayments) are clearly documented. A dedicated bank account assists with this.
- Step 8: Notify the SMSF auditor. The bare trust and LRBA must be disclosed in the SMSF’s annual audit. Your auditor will need copies of the bare trust deed, LRBA agreement, and supporting financials. Failure to disclose is a compliance breach.
- Step 9: Manage the transfer when the loan is repaid. Once the loan is fully repaid, engage your solicitor to transfer legal title from the bare trustee to the SMSF trustee. This involves stamp duty, discharge of mortgage, and update of title documents.
The Business Premises Strategy
The most common and financially compelling use of the SMSF bare trust structure for Pinnacle’s clients is purchasing the business owner’s commercial premises through the SMSF. This strategy is legal, widely used, and — when structured correctly — delivers significant long-term wealth and tax benefits.
How it works: The SMSF (via the LRBA/bare trust) purchases the commercial property. The business (owned separately by the SMSF member or their entity) leases the property back from the SMSF at market rent. This arrangement is permitted under the SIS Act because commercial property can be acquired from, and leased to, related parties — provided the lease is at arm’s length, market-rate terms.
The tax advantage is significant. Rental income received by the SMSF is taxed at 15% (or 0% if the fund is in pension phase). Compare this to rental income received personally, which would be taxed at marginal rates up to 47%. The business also gets a full tax deduction for the rent it pays. The business premises — often a significant asset — is accumulating inside a concessionally taxed environment.
Capital gains on eventual sale are also concessionally taxed. If the property is sold while the SMSF is in accumulation phase, the CGT discount after 12 months brings the effective rate to 10%. In pension phase, the gain may be entirely tax-free. High-income earners should also be aware that Division 293 tax may affect contributions going into the fund to service the LRBA, and those with large super balances approaching $3 million should factor in Division 296 tax, which became law on 13 March 2026 and applies to earnings from 1 July 2026.
One important rule: the rental arrangement must be at market rates and documented properly. The ATO actively reviews related-party leases in SMSF structures. A below-market rent arrangement will put the SMSF’s compliance status at risk.
Critical Rules You Must Not Break
The LRBA and bare trust structure has significant compliance obligations. The ATO actively reviews these arrangements. Breaching the rules can result in the SMSF being made non-complying — meaning the fund loses its concessional tax status and is taxed at the top marginal rate on its entire assets. The following rules are non-negotiable.
No improvements while the loan is outstanding
This is the rule that catches the most people off guard. While the loan is outstanding, the asset in the bare trust can be repaired and maintained, but it cannot be improved. Under the SIS Act, an improvement is anything that changes the character of the asset or makes it a fundamentally different asset. Replacing a roof (maintenance) is fine. Adding a new floor or subdividing the block (improvement/development) is not. If you breach this rule, the LRBA is invalid, and the fund may be treated as non-complying.
Related-party LRBAs must use ATO safe harbour terms
If your SMSF is borrowing from a related party — a family member, family trust, company, or another entity associated with fund members — the loan must comply with the ATO’s safe harbour requirements under PCG 2016/5. This sets out the interest rates, loan terms, and documentation requirements. Safe harbour rates change annually and are indexed to movements in the RBA cash rate. Falling outside safe harbour means the ATO will treat the arrangement as a non-arm’s length transaction, potentially applying non-arm’s length income (NALI) rules, which tax the income at the top marginal rate.
Cannot acquire assets from related parties (with limited exceptions)
An SMSF generally cannot acquire an asset from a related party of the fund. The exception: commercial property can be acquired from a related party, as can listed securities. Residential property cannot be acquired from a related party under any circumstances — not even via an LRBA. Attempting to do so puts the fund in breach of the in-house asset rules and the related-party acquisition prohibition.
Single acquirable asset rule
Each LRBA and bare trust covers a single acquirable asset only. If you want to purchase two properties, you need two separate LRBAs and two separate bare trusts — each with its own deed, trustee company, and bank account. You cannot bundle multiple assets into one arrangement.
Annual SMSF audit must cover the LRBA
Every year, the SMSF’s registered SMSF auditor must audit and verify compliance of the LRBA. This includes reviewing the bare trust deed, confirming the loan terms comply with the SIS Act, verifying loan repayments, and checking that no improvements have been made to the asset. Inadequate audit documentation or disclosure of the LRBA is a reportable breach.
What It Costs to Set Up a Bare Trust
The costs of establishing an SMSF bare trust and LRBA are not trivial — but they need to be weighed against the long-term tax and wealth benefits of the structure. Here is a general cost guide. Government fees are indexed and professional fees vary, so treat these as indicative.
| Item | Approximate Cost |
|---|---|
| Bare trust deed preparation | $1,500 – $3,000 |
| Corporate bare trustee incorporation | ASIC registration fee plus professional fees |
| ASIC annual review fee (trustee company) | Set by ASIC, indexed each 1 July |
| LRBA agreement | $1,000 – $2,500 |
| Stamp duty on asset purchase | Varies by state and asset value |
| Stamp duty on transfer (loan repaid) | Varies — some states have SMSF concessions |
| SMSF annual accounting + audit (with LRBA) | $3,500 – $6,000+ per year |
The most significant variable cost is stamp duty, which is state-specific and asset-value-dependent. Some Australian states provide stamp duty concessions for the transfer of assets from a bare trustee to an SMSF when the loan is repaid — confirm this with your solicitor before proceeding.
Total establishment costs for a typical commercial property LRBA (excluding stamp duty) typically fall in the range of $5,000 – $8,000 in professional fees. For a $1 million commercial property held in an SMSF for 15-20 years, this is a modest one-time cost relative to the compounding tax benefits. To model the tax impact on your overall income position, try our tax calculators.
Talk to Mina About Your SMSF
If you are considering using your SMSF to purchase a property — particularly your business’s commercial premises — Pinnacle Accounting & Advisory can help you understand whether the structure is right for you and what the next steps involve.
We work with clients across Melbourne and Australia on SMSF compliance, LRBA structuring, and long-term tax planning. Book a Consultation to discuss your situation.
How Pinnacle Helps — and What Requires Other Professionals
Setting up an SMSF bare trust and LRBA requires a team of professionals, not just one. Here is how the roles divide.
What Pinnacle handles
- SMSF establishment and trustee structure advice (as your registered tax agent and SMSF accountant)
- Annual SMSF accounting, tax return, and compliance reporting
- LRBA compliance review — ensuring the loan terms meet ATO requirements
- Related-party LRBA review against PCG 2016/5 safe harbour
- Co-ordinating with your solicitor and auditor throughout the process
- Ongoing tax planning — including how the LRBA fits within your broader business and personal tax strategy
What requires a solicitor
- Drafting the bare trust deed
- Drafting the LRBA agreement
- Incorporating the corporate bare trustee
- Managing conveyancing (property purchase and transfer)
- Stamp duty advice and assessment
What requires a licensed financial adviser
- Advice on whether an LRBA is the right investment strategy for your SMSF
- Advice on whether the specific property or asset is a suitable SMSF investment
- Advice on contribution strategies and drawdown planning
Pinnacle is a registered tax agent. We are not licensed to provide financial product advice or legal services. We work alongside your financial adviser and solicitor to ensure the SMSF structure is compliant and tax-efficient.
Frequently Asked Questions
What is a bare trust?
\u003cp\u003eA bare trust is the simplest form of trust. The trustee holds legal title to an asset for a single beneficiary and has no active duties and no discretion. It cannot decide who receives income or deal with the asset on its own, it acts only on the beneficiary’s instructions. In an SMSF the bare trust, also called a holding trust or custodian trust, holds legal title to one asset bought with borrowed money while the fund holds the beneficial interest.\u003c/p\u003e
Why does an SMSF need a bare trust to borrow?
\u003cp\u003eSection 67A of the SIS Act permits a limited recourse borrowing arrangement only where the asset is held on trust, so the lender’s recourse is limited to that single asset. The bare trust quarantines the asset. Without it there is no valid LRBA, and an SMSF has no other general ability to borrow.\u003c/p\u003e
What is the difference between a bare trust and a family trust?
\u003cp\u003eA family or discretionary trust gives the trustee broad discretion over how income is distributed among beneficiaries, and the trustee has active management duties. A bare trustee has no discretion at all. It holds legal title for one beneficiary, the SMSF, and acts only as directed. It cannot distribute income or deal with the asset independently.\u003c/p\u003e
Can the bare trustee be the same company as the SMSF trustee?
\u003cp\u003eNo. The bare trustee must be a separate legal entity from the SMSF trustee for the arrangement to be valid and the asset properly quarantined. It should also not be a company that acts as trustee of your family trust or an operating business, because that creates conflicts and exposes the asset to that company’s other liabilities. A dedicated company incorporated for the role is the standard approach.\u003c/p\u003e
How do you set up a bare trust for an SMSF?
\u003cp\u003eConfirm the asset is a single acquirable asset, have a solicitor draft the bare trust deed, incorporate a dedicated corporate bare trustee, arrange the LRBA, and only then sign the contract of sale in the bare trustee’s name. The order matters. The deed must exist before the asset is purchased, and the SMSF trustee’s name must not appear as the purchaser on the contract.\u003c/p\u003e
Do I pay stamp duty when the property transfers from the bare trustee to my SMSF?
\u003cp\u003eStamp duty is generally payable when legal title transfers from the bare trustee to the SMSF trustee after the loan is repaid. Rates and any concessions vary significantly by state and territory and change periodically, so get specific advice from your solicitor or a state revenue specialist rather than assuming a concession applies. Budget for this transfer cost when you model whether the strategy stacks up.\u003c/p\u003e
Can I renovate or develop a property held in an SMSF bare trust?
\u003cp\u003eWhile the loan is outstanding the asset can be repaired and maintained but not improved. Replacing a roof is maintenance. Adding a floor, subdividing or developing changes the character of the asset and breaches the single acquirable asset requirement, which invalidates the LRBA. This is the rule that catches trustees out most often.\u003c/p\u003e
What happens if the SMSF cannot repay the LRBA?
\u003cp\u003eThe lender’s recourse is limited to the asset held in the bare trust. They can take possession of and sell that asset but cannot pursue the fund’s other assets, such as cash or listed shares. That protection is the entire point of the limited recourse structure and is why it exists as an exception to the general borrowing prohibition.\u003c/p\u003e
Can my SMSF buy my business premises through an LRBA?
\u003cp\u003eYes, and it is one of the most effective strategies available to a business owner. Commercial property is one of the few assets an SMSF may acquire from a related party, so your fund can buy your business premises and lease them back to your business, provided the purchase is at market value and the lease is at market rent. Rent is taxed at 15% in the fund, or nil in pension phase, while the business claims a full deduction. The ATO reviews related party leases closely, so the terms must be documented properly.\u003c/p\u003e
This article contains general advice only and does not take into account your specific circumstances. Please speak with a qualified accountant or tax adviser before making financial decisions.
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