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Multi-asset bare trusts risk asset liquidation

Multiple asset bare trusts

SMSFs run the risk of having a fully paid property liquidated if a bare trust servicing multiple assets under a limited recourse borrowing arrangement is being used.

SMSF trustees should remain cautious around the use of bare trusts for multiple properties purchased under limited recourse borrowing arrangements (LRBA) as the risk of asset liquidation is significant, according to an SMSF technical expert.

SuperConcepts technical and private wealth executive manager Graeme Colley said properties were being liquidated because clients are retaining the asset in the bare trust after an LRBA has been extinguished.

Colley pointed out the situation is arising because the bare trust is holding more than one property under an LRBA where some loan repayments are becoming problematic.

“You can retain a property asset in a bare trust because the SMSF LRBA in-house asset exclusion determination comes into play,” he said during a recent webinar.

He added the determination means this retention can continue after the mortgage had been paid off, but recognised problems can surface with certain bare trust structures.

“In circumstances where the mortgage has been paid off, there can be other [properties with associated] loans [where] the company is also the bare trustee,” he said.

“If one of those properties’ [loan arrangements] fails, there will be a foreclosure on [that] mortgage. The property will need to be sold off and if it’s sold for less than the value of the mortgage, it may mean the other property held by the company bare trustee – which has no mortgage – may be liquidated.”

He noted in these cases, an SMSF would be better served by creating separate companies as trustee of the bare trust for each LRBA, and added compliance is a key issue to prevent adverse outcomes when the fund is holding property.

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