History of the Bare Trust / Custodian Trust for SMSFs in Australia

When clients come to me to discuss setting up a Bare Trust, I often begin with an old saying: “In life, there are four undertakings that bring more trouble than reward—matchmaking, guaranteeing someone else’s debt, raising doves, and beating the ceremonial drum”. The Bare or Custodian Trust fits neatly into that second category: carrying obligations without ownership, responsibility without reward.

What I find most interesting is that clients often ask me why the Bare Trust is necessary. Yet, almost no one asks how it came to be introduced in the first place—a story I find even more fascinating.

Before 2007: No Borrowing Allowed

Self-Managed Superannuation Funds (SMSFs) could not borrow to invest directly in property or other assets. Borrowing was broadly prohibited under the Superannuation Industry (Supervision) Act 1993 (SIS Act). This meant trustees could not gear into shares or property, no matter how attractive the investment.

It All Began with Telstra

During the government’s Telstra privatisations in the late 1990s and early 2000s, investors were offered instalment receipts: pay a deposit upfront, and the balance later. Legal title was held by a custodian until the final payment, while investors still received dividends and franking credits. Crucially, their liability was limited only to the unpaid amount — a form of limited recourse.

For most investors, this was straightforward. But for SMSFs, it posed a legal puzzle: was this borrowing (and therefore prohibited) or simply a structured equity product? The popularity of these instalments, particularly in the Telstra 3 (T3) retail offer of 2006, forced regulators and lawmakers to respond.

2007: The First Legislative Change

In 2007, Parliament amended the SIS Act by introducing s 67(4A), carving out a narrow exception to the borrowing prohibition. The amendment allowed SMSFs to borrow under very strict conditions — essentially to mirror the features of instalment warrants.

The key requirement was that the asset be held on trust:

• A custodian (or bare trustee) would hold legal title.

• The SMSF trustee would hold the beneficial interest.

• The fund would have the right to acquire legal title once the loan was repaid.

  
  

This marked the formal birth of the Bare (Custodian) Trust in SMSFs.

2010: Refinement of the Rules

In 2010, the framework was overhauled. Section 67(4A) was repealed and replaced with s 67A and s 67B, which continue to govern SMSF borrowings today. These provisions require that:

• Only one single acquirable asset (or a collection of identical assets, such as a parcel of shares) can be purchased under each arrangement.

• The borrowing must be limited recourse, restricting the lender’s rights to the asset itself.

• The asset must be held in a bare/custodian trust until the loan is fully repaid.

  
  

Later ATO guidance — notably SMSFR 2012/1 — clarified important practical points, such as what qualifies as a single acquirable asset and the distinction between repairs and improvements.

Today: Legacy of a Market Innovation

What began as a response to the Telstra instalment receipt puzzle has since become the foundation of SMSF gearing. While mainstream banks have largely withdrawn from LRBA lending and regulators keep a close eye on risk, the bare trust remains the essential legal structure that allows SMSFs to borrow for investment in both shares and property.