Yes, after the borrowings are repaid, the property held in the bare trust can be sold without first transferring legal title to the SMSF’s name. Here’s why and how this works:
- No Mandatory Transfer Required: Prior to 1 July 2021, SMSF rules (specifically the in-house asset provisions under section 83 of the Superannuation Industry (Supervision) Act 1993 (SISA)) often compelled trustees to transfer the asset from the bare trust to the SMSF upon loan repayment to avoid it being classified as an in-house asset (which could exceed the 5% limit). However, the ATO’s legislative instrument (SPR 2014/1, effective from April 2014) excludes the asset from in-house asset classification even after repayment, making transfer optional. Amendments to SISA in 2021 further relaxed this, removing the previous compulsion entirely.
- Sale Process from the Bare Trust:
- The bare trustee retains legal title and executes the sale contract (e.g., signs the transfer documents), acting solely on the SMSF trustee’s instructions, as a bare trust provides no discretionary powers.
- Sale proceeds (after any remaining costs) are paid directly to the SMSF, ensuring compliance with the sole purpose test (providing retirement benefits).
- Capital Gains Tax (CGT) treatment applies as if the SMSF held the asset directly: Any capital gain or loss is included in the SMSF’s assessable income, potentially eligible for the one-third CGT discount if held over 12 months.
What is the basis for the above conclusion?
- A key ATO legislative instrument, SPR 2014/1 (“Self-Managed Superannuation Funds (Limited Recourse Borrowing Arrangements – In-house Asset Exclusion) Determination 2014”), issued under SISA section 71(1)(f), explicitly excludes the SMSF’s interest in the bare trust from being classified as an in-house asset—even after repayment—as long as the asset remains held by the bare trustee and is “fundamentally the same”
- Prior to this 2014 determination, ATO guidance suggested potential in-house asset breaches if the asset wasn’t transferred promptly, but SPR 2014/1 resolved this, making transfer optional. The 2021 amendments via the Treasury Laws Amendment (2021 Measures No. 1) Act 2021 further reinforced flexibility in SMSF asset rules but primarily targeted other areas; the in-house exemption remains intact.
- No specific ATO ruling mandates transfer before sale; the structure’s ongoing validity under SPR 2014/1 supports this. However, ensure the lender’s security (e.g., mortgage) is discharged per SIS Regulation 13.14 to avoid charges over SMSF assets.
Are there any additional procedures we need to follow?
- The bare trust deed should explicitly grant the bare trustee the right to sell the property to ensure clarity, compliance, and operational efficiency. While bare trusts are inherently “passive” structures where the trustee acts solely as a nominee (holding legal title on instructions from the SMSF beneficiary without discretionary powers), implying basic conveyance rights, explicit clauses are standard practice and strongly recommended. If your deed lacks these clauses, consider amending it before any sale to mitigate risks.
- Trustees must document directions to the bare trustee for audit purposes.
