The Easiest Way to Structure a Bare Trust for SMSF Loans

A bare trust and custodian trustee structure is mandatory for any SMSF commercial loan under a limited recourse borrowing arrangement.

The trustee of your SMSF cannot hold legal title to a property being purchased with borrowed funds. The property must instead be held on trust by a separate entity, the custodian trustee, under a bare trust arrangement until the loan is repaid in full. This structure exists to satisfy the requirements of section 67A of the SIS Act and protects both the lender and the SMSF in the event of default.

Consider a Hobart SMSF purchasing a warehouse in Derwent Park to lease back to the member's logistics business. The SMSF trustee borrows under a limited recourse borrowing arrangement and appoints a custodian trustee to hold legal title. The SMSF holds the beneficial interest and receives rental income, but the custodian trustee remains the registered proprietor until the loan is discharged. Once repaid, title transfers to the SMSF trustee.

This arrangement is non-negotiable and applies whether you are purchasing an office building in the CBD, a retail shopfront in North Hobart, or industrial premises in Moonah.

Why the Custodian Trustee Must Be a Separate Entity

The custodian trustee must be a separate legal entity from the SMSF trustee and cannot be a member of the SMSF.

This separation ensures the lender's security interest is isolated from other SMSF assets, creating the limited recourse structure required under the SIS Act. If the SMSF defaults on the loan, the lender's recourse is limited to the property held by the custodian trustee. The lender cannot pursue other SMSF assets. Most lenders require the custodian trustee to be a corporate entity, typically a special-purpose company established solely for this transaction. Individual trustees may be accepted by some lenders but are less common in commercial transactions due to succession and control concerns.

In the Derwent Park warehouse scenario, the SMSF establishes a company to act as custodian trustee. That company holds legal title and grants the lender a registered mortgage. The SMSF trustee holds the beneficial interest, collects rent from the related party tenant under an arm's length lease, and makes loan repayments. The lender's security is confined to the warehouse, not the SMSF's other holdings.

The Bare Trust Deed and Holding Trust Deed

The bare trust deed defines the relationship between the custodian trustee and the SMSF trustee.

This document confirms that the custodian trustee holds legal title solely for the benefit of the SMSF and has no active duties beyond holding title and complying with instructions from the SMSF trustee. The deed must specify that the beneficial interest belongs to the SMSF, that the custodian has no discretion over the asset, and that title will transfer to the SMSF trustee once the loan is repaid. Some lenders refer to this document as a holding trust deed. The terminology varies, but the legal function is identical.

The bare trust deed is executed before settlement and must be provided to the lender as part of the loan documentation. The deed is registered on title in some jurisdictions or noted by way of caveat. The custodian trustee's role is passive. It does not manage the property, collect rent, or make decisions. Those functions remain with the SMSF trustee.

Setting Up the Custodian Trustee Entity

Most commercial SMSF lenders require the custodian trustee to be a company incorporated under the Corporations Act.

The company is typically incorporated with ASIC before the loan application is submitted. The company should have a corporate constitution that permits it to act as trustee. Directors of the custodian company are usually the same individuals who are trustees or directors of the SMSF trustee, but the entities remain legally separate. The company does not trade and exists solely to hold title under the bare trust.

For a SMSF commercial property purchase in Hobart, you will need to incorporate the custodian company, execute the bare trust deed, and provide certified copies of the company's incorporation documents and constitution to the lender. Some SMSF administrators offer custodian trustee services as part of their offering, but many funds establish their own entity to retain control and reduce ongoing fees.

Transfer of Title After Loan Repayment

Once the loan is repaid in full, legal title transfers from the custodian trustee to the SMSF trustee.

The bare trust deed obligates the custodian trustee to execute a transfer of land document upon discharge of the mortgage. This transfer is lodged with the relevant land titles office, in this case, the Recorder of Titles in Tasmania. Stamp duty may apply on the transfer depending on the state and the nature of the transaction, though exemptions or concessions often apply where the transfer is between a bare trustee and the beneficial owner. In Tasmania, a duty exemption is available under section 56 of the Duties Act 2001 for transfers between a bare trustee and the beneficial owner, subject to the Commissioner's satisfaction that the arrangement is genuine.

The transfer process is typically straightforward but must be completed correctly to avoid delays or duty assessment. Once registered, the SMSF trustee holds both legal and beneficial title and the custodian trustee entity can be deregistered if no longer required.

Differences Between Residential and Commercial SMSF Loan Structures

The bare trust structure for SMSF commercial loans is identical in form to that used for residential SMSF loans, but the regulatory and compliance context differs.

Commercial property that satisfies the business real property definition under section 66 of the SIS Act can be acquired from a related party and leased back to a related party without breaching in-house asset rules, provided the lease is on arm's length terms. Residential property cannot be leased to a related party under any circumstances. This distinction means the compliance focus for commercial transactions shifts to ensuring the lease is genuinely at market rates and the property's use satisfies the wholly and exclusively test for business real property.

The bare trust and custodian structure remains the same, but the substance of what you can do with the property once acquired is materially different. A warehouse in Derwent Park leased to the member's business is permissible. A residential unit in Battery Point leased to the member's daughter is not.

Related Party Acquisitions and Arm's Length Requirements

Business real property can be acquired from a related party under a limited recourse borrowing arrangement, but the transaction must be conducted on arm's length terms at market value.

This is an exception to the general prohibition on related party acquisitions under section 66 of the SIS Act. The valuation must be current, independent, and prepared by a qualified valuer. The terms of the sale, including settlement period and conditions, must reflect what would occur between unrelated parties. The property must satisfy the business real property definition at the time of acquisition, meaning it is used wholly and exclusively in one or more businesses.

For a Hobart SMSF purchasing a commercial premises in Sandy Bay from a related party, the fund must obtain a market valuation, document the transaction terms, and ensure the purchase price reflects that valuation. The lender will require the valuation as part of the loan assessment. The SMSF's auditor will review the transaction annually to confirm compliance.

Lender Requirements for Bare Trust Documentation

Lenders require the bare trust deed, custodian trustee incorporation documents, and evidence of the SMSF's beneficial ownership before settlement.

Documentation standards vary between lenders, but most require certified copies of the SMSF trust deed, the bare trust deed, the custodian company's constitution and certificate of incorporation, minutes authorising the borrowing and property purchase, and a signed loan application. Some lenders also require a letter of consent from the SMSF's auditor or administrator confirming the transaction is compliant. Missing or incomplete documentation is a common cause of settlement delay.

When comparing SMSF commercial lenders, consider not only LVR and rate but also their familiarity with bare trust structures and their turnaround time for document review. A lender experienced with SMSF transactions will identify documentation issues early and provide clear guidance on rectification.

Sole Purpose Test and Commercial Property Use

All commercial property held under an SMSF loan must be maintained solely to provide retirement benefits to fund members.

A related party lease is permissible for business real property, but the lease terms must not confer a present-day benefit to the member or related party beyond what would apply in an arm's length arrangement. Below-market rent, extended rent-free periods, or lease terms that disadvantage the fund may contravene section 62 of the SIS Act. The ATO may apply administrative penalties or issue a notice of non-compliance if the lease is not conducted on commercial terms.

For a Hobart SMSF leasing a commercial premises to a member's business, the rent must reflect current market rates for comparable properties in the area, lease terms should align with standard commercial practice, and any rent review mechanisms must be documented and applied. Independent rental appraisals are recommended at lease commencement and at each review.

When to Seek SMSF Specialist Advice

The bare trust structure is only one component of a compliant commercial property acquisition under a limited recourse borrowing arrangement.

You should obtain advice from a licensed SMSF specialist before committing to a purchase, particularly where the transaction involves a related party, mixed-use property, or multiple titles. The business real property definition is complex and fact-dependent. A property marketed as commercial may not satisfy the wholly and exclusively test if part of it is used for non-business purposes. Legislative changes commencing 10 August 2026 have tightened LRBA rules for certain property types, and ATO guidance is still being updated.

Call one of our team or book an appointment at a time that works for you to discuss your SMSF commercial loan structure and ensure your bare trust arrangement is correctly documented and compliant.

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