Why a Bare Trust Structure Is Mandatory for SMSF Property Borrowing
A bare trust is the only legally compliant structure for purchasing property with borrowed funds inside a Self-Managed Super Fund. The structure requires a custodian trustee to hold legal title to the property while your SMSF trustee controls the beneficial interest and makes all investment decisions.
The structure works because the SIS Act permits limited recourse borrowing arrangements but prohibits your SMSF from directly owning an asset that has debt attached. The custodian trustee holds the asset on trust for your SMSF until the loan is repaid. At that point, legal title transfers to your SMSF trustee and the bare trust is dissolved.
In Noosa Heads, this structure commonly applies when a fund wants to acquire a retail shopfront on Hastings Street or a warehouse unit in one of the Noosaville industrial estates. The custodian holds the property, your SMSF services the loan, and the rental income flows to the fund.
Who Acts as Custodian Trustee and What They Actually Do
Most lenders nominate an approved custodian trustee from their panel when you apply for an SMSF commercial loan. The custodian is typically a specialist trust company that charges an annual fee between $800 and $1,500 to hold title and maintain the bare trust deed.
The custodian's role is administrative, not discretionary. They hold legal title, sign loan documents on behalf of the trust, and transfer title back to your SMSF trustee once the debt is discharged. They do not make decisions about the property, collect rent, arrange repairs, or deal with tenants. Those responsibilities remain with your SMSF trustee.
Your SMSF trustee directs all activity. The custodian acts only on written instruction from the SMSF trustee and has no independent power to sell, lease, or encumber the property. The bare trust deed sets out these obligations and confirms that the SMSF trustee holds the beneficial interest at all times.
How the Bare Trust Deed Protects Your Fund Under Limited Recourse Rules
The bare trust deed creates a legal firewall between the borrowed asset and the rest of your SMSF. If the property fails to generate sufficient income to service the loan and the SMSF defaults, the lender's recourse is limited to the property held in the bare trust. The lender cannot pursue other assets in your SMSF.
This protection is the foundation of the limited recourse borrowing arrangement. Without the bare trust structure, the SMSF would breach section 67A of the SIS Act, which prohibits borrowing except under strict conditions.
Consider a fund that borrows to purchase a commercial unit in Noosa Junction for lease to a related entity. The tenant business experiences cash flow difficulties and stops paying rent. The SMSF cannot service the loan from rental income and does not have sufficient cash reserves. The lender enforces the security and sells the property at a loss. Under the limited recourse structure, the lender absorbs the shortfall. The SMSF's other assets, including member account balances and any residential property held directly by the fund, remain untouched.
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Business Real Property and Why It Matters for Related Party Transactions
Business real property is land and buildings used wholly and exclusively in one or more businesses. The definition under section 66 of the SIS Act determines whether a property can be acquired from a related party and whether it is exempt from the in-house asset rules.
The legislative changes commencing 10 August 2026 prohibit new limited recourse borrowing arrangements for residential property. Commercial property that satisfies the business real property definition is not affected by the new rules. The business real property exception remains available.
A property marketed as commercial does not automatically satisfy the definition. The actual use at the time of acquisition determines compliance. A warehouse leased to a business satisfies the test. A vacant shopfront being fitted out may not satisfy the test until it is occupied and used wholly and exclusively for business purposes.
In Noosa Heads, a medical practice purchasing the consulting rooms it currently rents would typically satisfy the business real property definition, provided the premises are used wholly and exclusively for the practice. The SMSF can acquire the property from a related party and lease it back to the member's business without breaching the in-house asset rules, provided the transaction occurs at market value and on arm's length terms.
What Happens When the Loan Is Repaid and Title Transfers
Once the SMSF makes the final loan repayment, the custodian trustee transfers legal title to your SMSF trustee. The transfer is an administrative process, not a new acquisition, and does not trigger stamp duty in most states. Queensland provides a specific exemption for this transfer under the Duties Act 2001.
The bare trust deed terminates when title is transferred. The custodian's role ends, and the annual custodian fee ceases. The property becomes a direct asset of the SMSF, and the SMSF trustee holds both legal and beneficial title.
The transfer does not reset the cost base for capital gains tax purposes. The original acquisition date and cost base under the bare trust continue to apply. If the SMSF holds the property for at least 12 months before selling, the fund is entitled to the one-third CGT discount in accumulation phase.
How Lenders Assess SMSF Commercial Loan Applications
Lenders assess SMSF commercial loan applications based on the property's rental income, the fund's capacity to service the debt, and the members' financial position outside the fund. Most lenders require the property to be tenanted or pre-leased before settlement.
The maximum loan-to-value ratio for SMSF commercial property is typically 70%, though some lenders may lend up to 80% for high-quality assets in strong locations. A 30% deposit is common. The deposit and all acquisition costs must be paid from the SMSF's existing cash reserves or member contributions. Borrowed funds cannot be used for settlement costs or improvements.
Serviceability is assessed on the net rental income after deducting outgoings, with a coverage ratio of at least 1.2 to 1.4 applied. If the rental income is insufficient, lenders may accept a letter of comfort from members or require ongoing member contributions to meet repayments. Some lenders require personal guarantees from members, though this can create compliance concerns if structured incorrectly.
Interest rates for SMSF commercial loans are typically 0.5% to 1.5% higher than standard commercial rates due to the additional compliance and structural requirements.
Single Asset Rule and Why Multiple Titles Require Separate Loans
Each limited recourse borrowing arrangement can fund the acquisition of only one asset. You cannot borrow under a single LRBA to acquire two separate commercial units, even if they are adjacent or part of the same development.
An exception applies where multiple titles are distinctly identifiable as a single asset because they are bought and sold together as one economic unit. A commercial building straddling two lots may qualify if the titles cannot be practically separated and the property functions as a single asset. Separate industrial units on separate titles do not qualify, even if purchased from the same seller at the same time.
If your fund wants to acquire two properties using borrowed funds, you must establish two separate bare trusts with two separate LRBAs. Each property is held by a different custodian trustee or under a separate bare trust arrangement, and each loan is limited in recourse to the specific property it funded. This increases the setup cost and ongoing administration but is necessary to comply with section 67A.
Related Party Leasing and Arm's Length Requirements
Business real property acquired under an LRBA can be leased to a related party of the SMSF, including a business owned or controlled by a member. The lease must be made on arm's length terms at market rent.
Arm's length terms means the lease structure, rent, duration, and conditions must reflect what unrelated parties would agree to in an open market transaction. The rent must be reviewed regularly, typically annually, and adjusted to reflect market movements. A lease at below-market rent may breach the sole purpose test and the in-house asset exemption.
Consider a Noosa Heads SMSF that purchases a retail space on Gympie Terrace and leases it to a member's physiotherapy practice. The lease is documented, specifies market rent based on an independent valuation, and includes an annual CPI review. The practice pays rent monthly, and the SMSF treats the arrangement as it would any commercial tenancy. The rental income is assessable to the fund at 15% in accumulation phase, and the SMSF can claim deductions for interest, rates, insurance, and maintenance.
Restrictions on Improvements and Drawdowns After Settlement
Borrowed funds under an LRBA cannot be used to improve the property after acquisition. If the property requires refurbishment or capital works, your SMSF must fund those improvements from existing cash reserves or additional member contributions. You cannot draw down further loan funds for this purpose.
This restriction applies to LRBAs entered into on or after 7 July 2010. The rule exists to prevent the single asset rule from being circumvented by borrowing to acquire a basic property and then using further borrowed funds to develop or improve it into a different asset.
If your fund intends to purchase a commercial property that requires fit-out or renovation, you must either complete the works before settlement using the SMSF's own funds, or negotiate for the vendor to complete the works before title passes. Some funds choose to purchase a property that is already income-producing and compliant with their needs to avoid this constraint.
Sole Purpose Test and Why Present-Day Benefits Create Risk
Every decision your SMSF trustee makes must be for the sole purpose of providing retirement benefits to members. Acquiring a property that delivers a present-day benefit to a member or related party can breach section 62 of the SIS Act.
A present-day benefit arises when the SMSF's investment decision favours the member's current interests over the fund's retirement purpose. Leasing a property to a member's business at below-market rent is one example. Acquiring a property in a location that suits the member's business rather than optimising the fund's return is another.
The ATO examines the intent and effect of the arrangement. A lease at market rent to a member's business is typically compliant, provided the transaction is commercial and benefits the fund. A lease at concessional rent, or a purchase that prioritises the member's business needs over the fund's financial outcome, is likely to breach the sole purpose test.
If you are considering using your SMSF to acquire the commercial premises your business currently rents, the transaction must deliver value to the fund independent of the convenience it provides to your business. The property must be acquired at market value, leased at market rent, and represent a sound investment for the fund on its own merits. Seek advice from a licensed SMSF specialist before proceeding, particularly if the acquisition involves related parties or the lease-back arrangement will be your fund's primary investment.
Call one of our team or book an appointment at a time that works for you to discuss how the bare trust structure applies to your situation and which lenders on our panel are currently writing SMSF commercial loans in Noosa Heads.
Frequently Asked Questions
What is a bare trust in an SMSF commercial property purchase?
A bare trust is a legal structure where a custodian trustee holds legal title to a property while your SMSF trustee controls the beneficial interest. It is mandatory when your SMSF borrows to purchase property, and ensures the lender's recourse is limited to the property held in the trust.
Can I lease SMSF-owned commercial property to my own business?
Yes, provided the property satisfies the business real property definition and the lease is on arm's length terms at market rent. The rent must be reviewed regularly and the arrangement must benefit the fund, not just your business.
What happens to the bare trust when the SMSF loan is repaid?
The custodian trustee transfers legal title to your SMSF trustee and the bare trust terminates. This transfer does not trigger stamp duty in Queensland and does not reset the cost base for capital gains tax purposes.
Can my SMSF borrow to buy multiple commercial properties under one loan?
No. Each limited recourse borrowing arrangement can fund only one asset. If your fund wants to acquire multiple properties with borrowed funds, you must establish separate bare trusts and separate loans for each property.
Can borrowed funds be used to renovate or improve the commercial property?
No. Borrowed funds under an LRBA can only be used to acquire the property. Any improvements or capital works must be funded from the SMSF's existing cash reserves or additional member contributions.
