Bare Trusts and Limited Recourse Borrowing

A superannuation fund is generally prohibited from borrowing. A limited recourse borrowing arrangement is a specific exception that allows a fund to borrow to acquire an asset, provided the arrangement is structured in the way the legislation requires.

How the structure works

The asset is not acquired by the fund directly. It is acquired by the trustee of a separate holding trust, often called a bare trust, which holds the legal title. The fund holds the beneficial interest and has a right to acquire legal title once the loan is repaid. The lender's recourse on default is limited to that asset, which is what protects the rest of the fund.

The essential requirements include that the borrowing is applied to acquire a single acquirable asset, that the asset is held on trust by the holding trustee, that the fund has the right to acquire legal ownership by making payments, and that the lender's rights are limited to the asset itself.

Sequence matters more than anything

The most common and most costly errors are about order and identity rather than drafting:

• The contract is signed in the wrong name. The purchaser should generally be the holding trustee. A contract entered into by the fund, or by a member personally, can require correction that itself attracts duty.
• The holding trust is established late. The trust should exist before the contract, not be papered afterwards.
• The deposit is paid from the wrong account.
• The deed does not permit borrowing. If the fund deed does not authorise it, the deed must be updated first.

State duty treatment of the eventual transfer of legal title to the fund depends on the arrangement being properly constituted from the outset. Getting the sequence right is what preserves that position.

Single acquirable asset

The borrowing must relate to one asset. Two titles, or a property that can be sold separately in parts, can breach that requirement. There are also real limits on how far borrowed money may be applied to improving an asset as distinct from repairing or maintaining it. Both are worth confirming before settlement rather than at audit.

What we prepare

• The holding trust deed, and the holding trustee company if one is being established.
• Confirmation that the fund deed authorises the arrangement, and an update where it does not.
• The loan agreement where the lender is a related party, on terms that meet the requirements for such loans.
• Trustee resolutions and the documents a commercial lender will require.
• The transfer of legal title to the fund once the loan is repaid.

This page is general information. It is not legal, tax or financial advice.