Custodian Trust to borrow in an SMSF

Custodian Trust - SMSF non-recourse loan

$315

How to borrow money in a Self-Managed Super Fund – Custodian Bare Trust Deed

Debt in a Self-Managed Superannuation Fund is generally not permitted. SMSFs are conservative fortresses for your retirement money. Prohibiting debt reduces risk. See the Explanatory Memorandum to the Superannuation Legislation Amendment Bill (No. 4) 1999:

Superannuation funds are generally not permitted to borrow in their own right. This is designed to reduce the risk to retirement income from gearing their assets.

Limited recourse borrowing through a Custodian Trust (bare trust)Custodian Trust for SMSF non recourse loan bare trust

However, the law allows the SMSF to borrow to buy an investment. The is under Part 7 SIS Act.  See in particular sections 67A and 67B Superannuation Industry (Supervision) Act 1993. The rules are strict and draconian:

  • a third party (custodian) holds the investment in a bare trust (custodian trust)
  • the custodian is the legal owner; the SMSF is the beneficial owner
  • if the SMSF fails to make repayments the lender’s only recourse is to that investment
  • if the SMSF defaults on the loan the lender cannot get its hands on any of the assets in the SMSF
  • other than the investment in the custodian trust the SMSF’s other assets are not exposed or at risk

Custodian Trust rules

  • the borrowings are to acquire a single asset (or a collection of identical assets that have the same market value – that are together treated as a single asset, e.g shares or gold bullion)
  • which the SMSF is not otherwise prohibited from acquiring (sole purpose test, investment strategy etc…)
  • the borrowed money is applied to:
  1. purchase the investment
  2. expenses of borrowing and acquiring (e.g. loan establishment and stamp duty)
  3. expenses of maintaining and repairing the investment
  • but the borrowed monies are not available to improve the investment

Asset purchased by the Custodian for the SMSF

The Custodian Trust is separate to your Self-Managed Superannuation Fund.

The trustee of the Custodian Trust is a company. You build the company first here.

The SMSF wishing to borrow to purchase the investment buys the investment in the Custodian’s name. The Custodian holds the investment as trustee for the Custodian Trust – not the SMSF.

The asset purchased is held on bare trust in the Custodian Trust. This is on behalf of the SMSF. The SMSF owns the investment beneficially. But the Custodian holds only the legal title to the investment. The investment is in the Custodian’s name. But the true or beneficial owner is the SMSF. The SMSF may take the asset from the Custodian Trust later. This is usually when the loan is repaid.

Only one investment for each Custodian Trust

A separate Custodian Trust is established for each investment. You cannot hold multiple assets in the same Custodian Trust.

How to complete the Purchase Contract

When purchasing the asset using borrowings, the asset is purchased in the Custodian’s name.

Stamping the Security Custodian Trust

The Custodian Trust and the document acquiring the investment may both need to be lodged for stamping in the relevant State.

Loan is made to the SMSF

The Custodian purchases the asset as trustee of the Custodian Trust. However, it is purchasing the asset beneficially for the SMSF.

It is the SMSF who borrows from the Lender to fund the purchase. The Custodian (as the mere legal owner of the asset) provides the security (e.g. if property a mortgage in favour of the Lender). This secures the SMSF borrowing.

The loan is ‘limited recourse’. This means that the SMSF is not exposed to the debt. The only security available to the Lender is the investment held by the Custodian in the Custodian Trust.

Limited Recourse Loan

The Custodian Trust provides the investment as security for the Loan made to the SMSF. This is the only asset that is provided to the Lender as security for the loan made to the SMSF.

The Lender’s right to recover is limited to the asset purchased in the Custodian Trust. If the SMSF defaults on the Loan the Lender can only take the asset in the Custodian Trust. Lenders have no recourse to any other assets owned by the SMSF.

  • The Lender has ‘full resource’ to the asset held in the Custodian Trust.
  • The Lender has ‘no recourse’ to the assets in the SMSF.

SMSF acquires the asset from the Custodian Trust – later

The superannuation law requires that the SMSF has the right to eventually transfer legal ownership of the investment. This is from the Custodian. This is after making the instalment payments. (Note: at all time the SMSF has ‘beneficial’ ownership)

Upon full payment of the Loan, the asset’s legal ownership transfers from the Custodian to the SMSF’s Trustee.

The ATO confirms that there is only nominal stamp duty and no Capital Gains Tax payable on the final transfer. Obviously the ATO has no jurisdiction over State stamp duty, so its view on the matter is of little value.

Suffice to say that Custodian Trusts prepared by Legal Consolidated, such as this one, have only nominal stamp duty and no CGT consequences. This is when it comes time to end the Custodian Trust and transfer the legal ownership of the investment to the SMSF.

Property Income and Expenses

The SMSF is the ‘beneficial owner’ or ‘true owner’ of the asset. The Custodian is only the ‘legal’ owner of the asset. The Custodian has no ‘beneficial’ interest in the asset.

Accordingly, the SMSF is taxed on all income from the investment. The SMSF is responsible for paying expenses. E.g. rates, insurance etc.

Your accountant merely adds the outgoings and income of the asset in the SMSF tax return.

Other types of bare trusts you can build on our law firm’s website:

Acknowledgement of Trust – AFTER the Trustee buys

Gifting Trust – ‘deathbed declaration’

Bare Trust Deed – hide assets you own

Telephone us if you need help building this Custodian Trust

We are a private taxation and superannuation law firm. If you need help structuring the loan speak to your financial adviser, accountant or lawyer. If they need help they can contact us directly.

Adjunct Professor, Dr Brett Davies
Legal Consolidated Barristers & Solicitor
National Australian law firm

[email protected]

Mobile: 0477 796 959
Direct: 08 6389 0400
National: 1800 141 612

13/09/2019

Custodian Trust to borrow in an SMSF

How to borrow money in a Self-Managed Super Fund – Custodian Bare Trust Deed Debt in a Self-Managed Superannuation Fund is generally not permitted. SMSFs are conservative fortresses for your retirement money. Prohibiting debt reduces risk. See the Explanatory Memorandum to the Superannuation Legislation Amendment Bill (No. 4) 1999: Superannuation funds […]