What is a Custody Trust? Finance Experts in Victoria Park

We often have clients ask us regarding custody trusts, the dos, don’ts and best best practices.

Today we are looking at what custody trusts are, how they should be managed and what are the important details to consider.

Firstly, what is a Custody Trust?

In 2007, treasurer at the time, Wayne Swan Amended the Superannuation Industry Act, allowing self-managed superannuation funds (SMSF) the ability to borrow money to purchase property. So, custody trust was born. A custody trust is also known as bare trust, custodian trust or property trust. All different names for the same thing – a limited recourse borrowing arrangement. In other words a custody trust enables one to borrow money to purchase property in an SMSF.

The Advantages or establishing a custody trust

Firstly, a custody trust allows you financial leverage to invest in your SMSF. When done wisely, this investment has a potential to grow significantly.

A custody trust also offers protection. In the case of a loan default, the bank does not have access to other assets within the SMSF so they remain safe.

In addition, all cost related to the property such as water, rates, maintenance and repairs, can all be paid by the SMSF. Rental income is also deposited automatically into the SMSF.

When it comes to custody trusts, there are a number of details that are worth keeping in mind.

• The lender – when it comes to custody trusts, the lender does not have to be a bank.

• Money can be borrowed by the trustee and then the trustee can on lend to the SMSF.

• Stamp duty – there’s no stamp duty on transfer of the asset from the custodian trust to the SMSF.

Residential Property

A residential property which is acquired through the SMSF can be for investment purposes only and must not be lived in by the trustees, members, or any related parties. And all investments must pass the sole purpose test.

Commercial Property

When it comes to commercial property, different rules will apply and become a little more complex so it is advised to consult with a solicitor to ensure every detail is covered.

A common question we get from clients is what name should appear on the property purchased in the SMSF. The answer to that is the trustee of the bare trust, meaning, if the trustee is a company, the company name will appear on the contract and if the trustee is an individual so their name will appear on the contract.

Another question we often get from clients is regarding the structure that should be used – Individual or corporate. Our answer and advice for that is to always check with your lender. There are pros and cons for both and it is crucial to understand the the advantages and disadvantages for each strategy.

If you are looking for any further advice or information, please contact us at Eventum Consulting and we would be happy to help guide you in the right direction.