Bare Trusts and LRBAs: A Smart Strategy for SMSF Investment Growth
In the ever-evolving landscape of tax and accounting, strategic financial planning is essential for businesses and individuals seeking to optimise their investment structures. One area that has gained significant traction, particularly among Self-Managed Super Funds (SMSFs), is the use of Bare Trusts in Limited Recourse Borrowing Arrangements (LRBAs). Understanding how these structures work can unlock new investment opportunities while ensuring compliance with regulatory requirements.
What is a Bare Trust?
A Bare Trust is one of the simplest trust structures available. It is a legal arrangement in which a trustee holds a specific asset on behalf of clearly identified beneficiaries. The trustee has no discretionary powers and must act according to the instructions of the beneficiary, ensuring a straightforward ownership arrangement.
The Role of Bare Trusts in SMSFs and LRBAs
Under Sections 67A & 67B of the Superannuation Industry (Supervision) Act 1993, SMSFs are permitted to borrow funds under very specific conditions. This is where Bare Trusts play a crucial role. When an SMSF wishes to acquire an asset using borrowed funds, a Bare Trust is established to hold the asset on behalf of the fund. This structure allows the SMSF to leverage financing while ensuring compliance with superannuation regulations.
Key provisions of a Bare Trust in an LRBA include:
Single Asset Holding: The trust can hold only one asset per borrowing arrangement.
Limited Recourse: The lender’s recourse is restricted solely to the asset within the trust, protecting the SMSF’s other assets.
Asset Transfer Requirement: Once the loan is fully repaid, the trustee must transfer legal ownership of the asset to the SMSF.
Income Allocation: Any income generated by the asset must be directed to the SMSF.
Advantages of Using a Bare Trust in an LRBA
Utilising a Bare Trust in an SMSF borrowing arrangement presents several advantages:
Tax Efficiency: Proper structuring can optimise tax positions and minimise unnecessary liabilities such as capital gains tax and stamp duty.
Investment Growth Potential: Borrowing allows SMSFs to access high-value investments that may otherwise be unattainable.
Regulatory Compliance: Establishing a Bare Trust ensures that SMSFs adhere to strict superannuation borrowing rules, reducing legal risks.
Considerations and Compliance Requirements
While Bare Trusts provide opportunities for strategic asset acquisition, there are important compliance factors to consider:
Proper Documentation: A correctly structured Bare Trust Deed is crucial to meeting legislative requirements and avoiding double taxation.
Trustee Responsibilities: The trustee must act solely as a legal custodian and cannot exercise discretion over the asset.
Ongoing Reporting: SMSFs must maintain accurate records and financial statements to satisfy tax and superannuation regulations.
How Aero Accounting Group Can Help
Setting up a Bare Trust for an LRBA requires meticulous planning and expert guidance. At Aero Accounting Group, our team specializes in structuring trusts, ensuring tax efficiency, and navigating complex SMSF regulations. Whether you’re exploring investment strategies or need assistance with trust compliance, we provide tailored solutions to help you achieve your goals.
Take the next step toward optimising your investment strategy. Contact Aero Accounting Group today to speak with our experts and gain clarity on the best approach for your SMSF.
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