LRBA Bare Trust and Custodian Trust Documentation
A limited recourse borrowing arrangement cannot proceed without a correctly established bare trust. The bare trust is the legal structure that holds the acquired asset separately from the fund's other assets until the loan is fully repaid. If the bare trust is not established before settlement, the entire LRBA structure fails from a compliance perspective. We prepare all bare trust and custodian trust documentation for SMSF limited recourse borrowing arrangements, ensuring the legal foundation of your borrowing arrangement is correct from the first day.
The Bare Trust Is Not Optional. It Is the Legal Cornerstone of Every SMSF Borrowing Arrangement.
The limited recourse borrowing arrangement rules under the superannuation legislation require that the asset acquired under an LRBA be held by a separate bare trustee on trust for the SMSF until the loan is repaid. This requirement is not a formality. It is the fundamental legal mechanism that gives the arrangement its limited recourse character and protects the fund’s other assets from the lender’s recourse in the event of a default.
The bare trust must be established and the bare trustee must be in place before settlement occurs. The asset must be acquired in the name of the bare trustee, not the SMSF trustee. If the asset is acquired in the name of the SMSF trustee directly, the LRBA structure has not been correctly implemented and the fund may be in breach of the superannuation legislation regardless of how the loan agreement is structured.
This is one of the most common and most costly errors in SMSF LRBA implementation. A trustee who acquires a property in the SMSF’s name rather than the bare trustee’s name has not implemented an LRBA at all. The fund has simply borrowed money and acquired an asset directly, which is a contravention of the superannuation legislation’s prohibition on direct borrowing by superannuation funds. Correcting this error requires the asset to be transferred into the correct bare trust structure, which can involve stamp duty, legal fees, and significant administrative complexity depending on the state in which the property is located.
At New Wave SMSF, we prepare all bare trust and custodian trust documentation for SMSF limited recourse borrowing arrangements as part of an integrated legal and advisory service. We ensure the structure is established correctly before settlement occurs, every document is prepared in accordance with the superannuation legislation and the ATO’s requirements, and the fund’s LRBA is built on a legally sound foundation from day one.
This information is general in nature and does not constitute legal advice. Legal services are delivered by New Wave Law, part of the New Wave Group. Before acting on any information on this page, please seek advice from a qualified legal practitioner.
What Our Bare Trust Documentation Service Covers
We prepare all legal documentation required to establish the bare trust and custodian trust structure for your SMSF’s limited recourse borrowing arrangement.
Bare Trust Deed Preparation
We prepare the bare trust deed that establishes the legal relationship between the bare trustee and the SMSF trustee in respect of the acquired asset. The bare trust deed must correctly identify the bare trustee, the SMSF trustee as the beneficial owner, the asset being acquired, and the terms on which the bare trustee holds the asset. Every bare trust deed we prepare is consistent with the superannuation legislation and the ATO’s requirements for a compliant LRBA structure.
Custodian Trust Company Establishment
Where the bare trustee is a company established specifically for the purpose of acting as bare trustee for the LRBA, we establish the custodian trust company with ASIC, prepare the company constitution, and ensure the company is ready to act as bare trustee before settlement. A dedicated custodian trust company provides a cleaner legal structure than an individual bare trustee and is the approach recommended by most specialist SMSF legal advisers.
LRBA Structure Documentation
We prepare all supporting documentation for the LRBA structure, including the trustee resolution authorising the borrowing arrangement, the acknowledgment of beneficial ownership, and any other documents required by the lender or the superannuation legislation to establish the arrangement correctly. Every document is prepared in coordination with the loan agreement to ensure the full structure is legally consistent and compliant.
Bare Trust Wind-Up and Asset Transfer
When the LRBA loan is fully repaid, the bare trust must be formally wound up and the legal title to the asset must be transferred from the bare trustee to the SMSF trustee. We manage the wind-up process, prepare the transfer documentation, liaise with the relevant state revenue authority regarding any stamp duty implications, and ensure the asset is correctly recorded in the fund’s name from the date of transfer.
How the Bare Trust Structure Works and Why Every Detail Matters
The bare trust structure is deceptively simple in concept but requires precise legal implementation to function correctly. Understanding how the structure works helps trustees appreciate why the documentation must be prepared correctly before the acquisition proceeds.
Under a correctly implemented LRBA, the acquisition process works as follows. The SMSF trustee enters into the loan agreement with the lender and directs the loan funds to be used to acquire the asset. The asset is acquired in the name of the bare trustee, who holds legal title to the asset on trust for the SMSF trustee as beneficial owner. The SMSF trustee makes loan repayments from the fund’s assets throughout the life of the arrangement. When the loan is fully repaid, the bare trustee transfers legal title to the asset to the SMSF trustee and the bare trust is wound up.
The limited recourse character of the arrangement arises from the separation of the acquired asset from the fund’s other assets. Because the asset is held by the bare trustee rather than the SMSF trustee, the lender’s security interest is limited to the acquired asset. In the event of a default, the lender can only enforce against the asset held in the bare trust. The fund’s other assets, held directly by the SMSF trustee, are beyond the lender’s reach.
This protection only works if the structure is implemented correctly. The asset must be in the bare trustee’s name, the bare trust deed must correctly establish the beneficial ownership arrangement, and the loan agreement must be consistent with the bare trust structure. Any deviation from this structure undermines the limited recourse character of the arrangement and may expose the fund’s other assets to the lender’s recourse.
The ATO has specific requirements for the documentation of bare trust arrangements and has published guidance on what constitutes a compliant LRBA structure. We prepare every bare trust document in accordance with this guidance and ensure the full structure meets the ATO’s requirements before the acquisition proceeds.
Common Bare Trust Errors That Compromise the LRBA Structure
These are the bare trust documentation errors we most commonly identify in LRBA arrangements that were implemented without specialist legal advice.
- Asset Acquired in the Wrong Name
Acquiring the asset in the name of the SMSF trustee rather than the bare trustee is the most fundamental bare trust error and the one with the most serious consequences. The LRBA structure does not exist if the asset is not held by the bare trustee. The fund has simply borrowed directly, which is prohibited under the superannuation legislation. Correcting this error requires a legal transfer of the asset into the correct structure, which can involve stamp duty and significant legal cost.
- Bare Trust Deed Not Prepared Before Settlement
The bare trust deed must be in place before the asset is acquired. Preparing the bare trust deed after settlement means the asset was acquired without the bare trust structure in place, which undermines the legal foundation of the arrangement. The ATO’s compliance guidance is clear that the bare trust must be established before the acquisition occurs.
- Using an Individual as Bare Trustee Without a Deed
Using an individual as bare trustee without a properly executed bare trust deed creates a situation where the legal relationship between the bare trustee and the SMSF trustee is not documented. Without a deed, the beneficial ownership arrangement is not formally established and the structure is vulnerable to legal challenge. A properly executed bare trust deed is essential regardless of whether the bare trustee is an individual or a company.
- Bare Trust Not Wound Up After Loan Repayment
Where the LRBA loan has been fully repaid but the bare trust has not been wound up and the asset has not been transferred to the SMSF trustee, the fund continues to hold a beneficial interest rather than legal title to the asset. This creates ongoing legal and accounting complexity and in some states may trigger stamp duty obligations if the transfer is delayed. The bare trust wind-up must be managed promptly once the loan is repaid.
Who This Service Is For
Trustees Implementing a New LRBA
You are implementing a limited recourse borrowing arrangement to acquire a property or other asset inside your SMSF and you need the bare trust documentation prepared correctly before settlement. You want a specialist legal team to prepare every document in the structure and ensure the arrangement is legally sound from day one.
Trustees With an Existing LRBA Whose Documentation Has Not Been Reviewed
Your fund has an LRBA in place and you are not confident that the bare trust documentation was prepared correctly at the time of establishment. You want a specialist legal review of the existing documentation to identify any gaps or errors and advise on any corrective action required.
Trustees Approaching Full Loan Repayment
Your LRBA loan is nearing full repayment and you want the bare trust wind-up and asset transfer managed correctly. You want the legal transfer documentation prepared, any stamp duty implications assessed, and the asset correctly recorded in the fund’s name from the date of transfer.
Trustees Who Have Discovered a Documentation Error
You have identified that your bare trust documentation contains an error, whether the asset is in the wrong name, the deed was not prepared before settlement, or the structure is otherwise non-compliant. You want a specialist legal team to assess the position and advise on the corrective steps available.
The New Wave SMSF Difference
Documentation Prepared Before Settlement, Every Time
We prepare all bare trust documentation before the acquisition proceeds. We never allow a client to settle on an LRBA property without the bare trust structure in place. The legal foundation of the arrangement is correct from day one, every time.
- Legal and Accounting Coordinated Throughout the LRBA Lifecycle
At New Wave SMSF, the bare trust documentation is prepared by New Wave Law in coordination with the accounting team managing your LRBA accounting and the financial planner advising on your LRBA strategy. The legal structure, the accounting treatment, and the strategic advice are all aligned throughout the life of the arrangement.
- Full Lifecycle Management From Establishment to Wind-Up
We manage the legal documentation requirements for your LRBA from initial establishment through to bare trust wind-up and asset transfer. You do not need a different legal adviser at each stage of the arrangement. Our team understands every phase of the LRBA legal lifecycle and manages each one with consistent specialist knowledge.
Implementing an LRBA? Make Sure the Bare Trust Structure Is Right Before You Settle.
The bare trust is the legal cornerstone of every SMSF borrowing arrangement. Getting it right before settlement costs a fraction of what it costs to fix it afterwards. Our legal team is ready to prepare every document your LRBA structure requires.
What Our Clients Say
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Disclaimer
This information is general in nature and does not constitute legal advice. Legal services are delivered by New Wave Law, part of the New Wave Group. The information on this page is intended as a general guide only and should not be relied upon as a substitute for professional legal advice tailored to your specific circumstances. Before acting on any information on this page, please seek advice from a qualified legal practitioner.