Bare Trusts

What is a Bare Trust?

A Bare Trust is as simple as trust structures come. It’s a scenario where a trustee holds an item or property on behalf of the beneficiaries. The beneficiaries, or the real owners, are clearly identified, and the trustee follows their instructions to the letter.

The trustee holds the legal title but doesn’t own the property. They are like a “straw man,” a nominee controlled by the beneficiary. If the beneficiary says, “Transfer the property,” that’s exactly what the trustee does.

Advantages of Bare Trusts

Bare Trusts come with some distinct advantages, including:

• The beneficial ownership doesn’t change. The trustee simply holds the asset for the beneficiary. 
• There is generally no stamp duty or capital gains tax when transferring the assets into the bare trust.
• The trustee can’t make decisions regarding the asset. They are bound to follow the beneficiary’s instructions.
• It can be used to hide the fact that you own particular assets.

Disadvantages of Bare Trusts

But, like all things, Bare Trusts aren’t perfect. Disadvantages include:

• They don’t offer any significant asset protection and they can’t shield property from creditors.
• The trustee must follow the beneficiary’s instructions. This can also be seen as a disadvantage. The trustee can’t act or make decisions independently.

Tax Implications of Bare Trusts

Bare Trusts have various tax implications, which encompass Goods and Services Tax (GST), Capital Gains Tax (CGT), and income tax.

Regarding GST, all types of trusts, including Bare Trusts, are considered entities. However, no specific rules apply uniquely to Bare Trusts under GST law. You will have to apply using the general rules, just like any other trust.

When it comes to CGT, if a trustee disposes of trust assets, the action is treated as a disposal by the beneficiary for CGT purposes. Understanding this point is crucial when you’re calculating your taxes. Lastly, concerning income tax, the burden falls on the beneficiary, not the trustee. This is because the asset in the Bare Trust always belongs to the beneficiary. Hence, any income derived from it is the beneficiary’s income for tax purposes.

Establishing a Bare Trust

You can set up a bare trust through a declaration of trust or a deed of settlement.  If you own a property, you can declare yourself the trustee. This means you hold the property for the beneficiaries.  Or, you can transfer property to a third person. Just make sure they agree to hold it on trust for the beneficiaries.

When to Use a Bare Trust

So, when should you use a Bare Trust? They can be used to buy property secretly, or for someone else, like a spouse. This means your name doesn’t come up when someone does a Title Search on your property.

You can also use a Bare Trust to buy property using a Self-Managed Super Fund (SMSF). If there isn’t enough money, a loan can help to complete the purchase.

Bare Trusts and Self-Managed Super Funds (SMSF)

You might wonder whether Bare Trusts and SMSFs can work together. They certainly can! 

A self-managed Superannuation fund can only borrow money in minimal circumstances. A Bare Trust is often used when purchasing a single asset for the benefit of an SMSF. They allow an SMSF to borrow funds from a third party to buy an asset. This fulfils the requirements of the Superannuation Industry (Supervision) Act 1993, known as a limited recourse borrowing arrangement.

If you’re setting up a Bare Trust for a limited recourse borrowing arrangement, there are specific provisions to note. The trust can only hold one asset per arrangement. The trustee must give any income from the trust asset to the SMSF trustee. If requested, the trustee must transfer the asset to the Superannuation Fund once the loan is repaid.

Contractual Obligations

Who signs the contract of sale in a Bare Trust? It’s the trustee. They hold the legal title to the property on trust for the beneficiary. There’s no problem with double transfer duty as long as the Bare Trust deed was signed before the offer and acceptance.

Trustee and Beneficiary Obligations

Entering a Bare Trust arrangement isn’t a decision to be taken lightly. As a trustee or beneficiary, you must fully know your obligations. For trustees, the duty is straightforward. You hold the asset and transfer it at the beneficiary’s request. As a beneficiary, you are the property’s valid owner and have the power to instruct the trustee.

Frequently Asked Questions about Bare Trusts

Does the trust appear on the Certificate of Title? 

Declarations of trust may be deposited with the Registrar under the Transfer of Land Act, and a Registrar’s Caveat is lodged to protect the interests of the beneficiaries under the trust deed.

What is the duty on the transfer? 

The transaction is subject to nominal transfer duty, as there will be no change in beneficial ownership if a Bare Trust declaration or deed is present.

Can a Bare Trust be changed or revoked? 

Depending on the terms of the trust, changing or revoking a Bare Trust may be complex and could involve legal implications.

What happens to a Bare Trust if the trustee or beneficiary dies? 

The process can be complicated and depends on various factors, including whether the trustee/beneficiary left a will or had joint trustees/beneficiaries.

Can the trustee refuse to transfer the asset to the beneficiary in a Bare Trust? 

Generally, in a Bare Trust, the trustee must comply with all instructions from the beneficiary, including requests to transfer the property.

Who pays for the maintenance and upkeep of the property in a Bare Trust? 

The trustee would be responsible for maintaining the property as the legal owner. However, the beneficiary may reimburse these costs as the ultimate financial beneficiary.

Can more than one asset be held in a Bare Trust? 

In most cases, a Bare Trust can hold multiple assets as long as each is held for the same beneficiary. In the context of SMSF, each borrowing arrangement requires a separate trust.

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