SMSFs using a bare trust to hold an asset purchased using a limited recourse borrowing arrangement (LRBA) should remember that vehicle is limited in its scope and actions and any extension of those could cause it to change its status, an sector educator has pointed out.
Advisers Digest director Peter Johnson said that since a bare trust, or mere custodian arrangement, for an LRBA-purchased asset only held the title to an asset while the SMSF held the beneficial ownership and control, it was important to keep those separated.
“With a mere custodian arrangement, you don’t need to mention the trust in the accounts. You have the property and the loan and any rent is income of the fund, not income of the trust, so you also don’t complete a tax return in the trust,” Johnson said in a presentation hosted today by the Institute of Financial Professionals Australia.
He pointed out while the Superannuation Industry (Supervision) Act outlines the law in regards to the use of a bare trust, and this use should be detailed in the trust deed, it was Goods and Services Tax (GST) Ruling 2008/3 that dictated the minimal duties and responsibilities that should be allocated to these vehicles.
“We want to make sure if it’s a custodian arrangement that we have a bare trust, not an operating trust, and we have a GST ruling for that,” he said.
“What that ruling states is a bare trust is a trust where the trustee has no duties other than to hold the asset.
“I can think of a duty the bare trustee has beyond holding the asset and that is a duty to execute a mortgage agreement. You may also want to register a lease with the relevant land titles office.
“The bare trustee has to sign that, not the SMSF trustee, because the land titles office won’t register anything because it’s signed by the wrong party.
“However, the GST ruling does go on to say if the bare trustee is to have minimal duties, they can’t be making those decisions because then you’ve got an operating trust, [which can’t hold the asset].
“The entity that has to make those decisions is the SMSF trustee.
“So whenever the SMSF trustee wants the bare trustee to do something, they should instruct them to do it, such as ‘here is a lease, please execute it on our behalf’ or ‘here is the mortgage, please execute it on our behalf’.”
Jason Spits
SENIOR JOURNALIST
Jason is a senior journalist with Benchmark Media and writes for the selfmanagedsuper website and magazine and smstrusteenews website. He has covered financial services since 1999 and has written about life insurance, superannuation, investment management and financial advice, in both a freelance and in-house capacity, and also did a brief stint as a media manager for an industry association. He has been the editor of trade titles Money Management and Financial Standard, and was most recently senior journalist with life insurance title Riskinfo.
Articles by Jason