Legal Tip 83: What is a Bare Trust?

Discussion in 'Legal Issues' started by Terry_w, 7th Oct, 2015.

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  1. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

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    A bare trust is a trust where A holds property for B absolutely. There is no discretion involved as the beneficiary is absolutely entitled to both the capital and the income of the trust. There is no nudity involved either.

    An example would be Mum holding property for a minor child. When the child reaches 18 they can demand title be transferred to themselves.

    A bare trust can also be used to hide ownership - you want to buy the property next door, but don’t want the neighbour to know you are the potential purchaser so set up a Bare Trust and have the trustee enter the contract and purchase the property.

    There are CGT exemptions on the transfer from the trustee to the beneficiary and most states also provide stamp duty exemptions. Proper evidence will be needed to demonstrate the trust relationship was in existence from the beginning - as you can imagine it would be open to potential abuse were this not to be the case.

    A bare trust can work well where there are 2 parties wanting to buy one block of land and then split it with each party taking one block each. This is normally a CGT event and a dutiable event, but combined with a deed of partition it may be possible to avoid both by using a bare trust. See

    Legal Tip 77: Joint Purchasers of Land and deeds of partition
    https://propertychat.com.au/communi...urchasers-of-land-and-deeds-of-partition.3888
     
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  2. jaybean

    jaybean Well-Known Member

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    Should I go through a lawyer to set one up? Darryl sent me a template once and it was so simple.
     
  3. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

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  4. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

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    that depends on your level of understanding, how confident you are and your risk aversion levels!
     
  5. Perp

    Perp Well-Known Member

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    @Terry_w, is the trustee of a bare trust personally liable for debts of the trust related to the asset they're holding?

    Sorry if I'm going slow, but I'm trying to think through this scenario... couple amicably divorcing, PPOR is highly leveraged due to recent purchase and market drop - it's at 90% LVR. PPOR and mortgage were in joint names. Both parties want wife to stay living in PPOR with kids and take over mortgage. Wife can afford repayments, but they don't want to pay LMI that would be required to transfer mortgage into wife's name.

    So basically, husband is happy to transfer title to wife, but due to bank's requirement for LMI, a straight transfer doesn't seem practical. Of course, if husband is to transfer title, he also wants to be off the hook re wife's handling of mortgage, too.

    Could they agree that the couple holds the PPOR on bare trust for the wife? If so, would the husband be released of further liability with respect to the property and its mortgage?

    That's sort of what I'm hearing, but it also doesn't seem right to me that you'd be able to defeat a bank's mortgage so readily, so I suspect it's not viable...
     
  6. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

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    Yes all trustees are personally, but can have recourse to the trust assets.

    If the husband declares he holds his share for the wife if the loan agreement isn't reentered into he is still bound by the old agreement, and even if a new one entered into the husband will be personally liable. If things go bad though he could potentially make a claim against the wife.
     
  7. Perp

    Perp Well-Known Member

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    When you say the husband would still be personally liable even if there's a new loan agreement (eg wife takes our mortgage only in her name), on what basis is that? Because he's on the title? That wouldn't apply, because if the wife takes out a new mortgage, they'd also transfer title - it's only the challenge of renewing the mortgage that's blocking transfer.
     
  8. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

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    Ah true. But it would be a breach of their loan agreement to declare a trust without the mortgagee's permission (probably) so if they both qualify for a loan together they could do a new loan now (but lenders won't lend for bare trust situations actually) and then the wife could later qualify for a loan on her own and transfer title.
     
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  9. Harry30

    Harry30 Well-Known Member

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    Maybe this question has been answered.

    If person A holds land in bare trust for person B, how is land tax levied (assume Vic).

    Assume ‘person A’ is company, and holds single property (ie. the property in this example) in bare trust for person B.
    And person B has large land holdings , so higher land tax threshold than ‘person A’ (who only owns current single property)

    Is land tax levied:

    1) at the company rate (person A), or
    2) at the trust rate (against person A as trustee), or
    3) against person B (as beneficiary of bare trust).
     
  10. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    At the time of registration the relevant trust documents are required and OSR will assess based on this.

    eg In most cases a SMSF custodian trustee will be registered as if the SMSF was holding the property and allowed a threshold. Remember too that this trust documentation was required so that future duty is not payable to revert ownership to the owner (ie SMSF)

    Its all part of the process of seeking legal advice on such issues.
     
  11. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

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    You would need to get specific legal advice on this, but I would think the answer would be 3.
     
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  12. Harry30

    Harry30 Well-Known Member

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    And maybe get a private ruling. I assume the SROs do these and they operate in a similar way to the ATO private rulings.
     
  13. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

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    NSW and VIC do, in QLD there is no private ruling system so it is a take a risk and see what happens approach.
     
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  14. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    QLD OSR are always happy to give written response on a issue and they act like a private ruling. QLD duties are more complex than any other state and the bare trust is something to be cautious with in QLD. Darryl Richards at Certus may be able to assist.
     
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