A self-managed super fund (SMSF) gives investors control and flexibility over their assets. Many SMSF trustees are interested in real estate investment to diversify their portfolios and earn significant long-term returns.
Can a SMSF buy vacant land? It’s an intriguing question many Australians ask themselves.
You may use your SMSF to invest in various properties, including vacant land. Please remember that a self-managed super fund can only borrow money to purchase property under a Limited Recourse Borrowing Agreement (LRBA). Interested investors must follow a set of stringent rules.
For instance, investors cannot use LBRA funds to improve the asset. They cannot make subsequent changes that modify the asset’s essential character until they pay the entire loan. Hence, vacant land is a rare SMSF investment option because of bleak development possibilities.
Understanding SMSF rules and property purchases is intimidating, especially if you’re unaccustomed to super fund investments. As experienced Gold Coast SMSF accountants, we strongly recommend seeking the advice of a reputable tax expert before proceeding.
Here’s a list of questions about purchasing land for your SMSF to get you started.
Can I use my SMSF to purchase an empty block of land?
You can purchase an empty block of land with an established SMSF. If you rely on a retail or super industry fund, you cannot make investment decisions or buy an asset directly with your super balance.
Conversely, a self-managed super fund allows direct property investments. SMSF trustees can purchase land with the trust deed’s approval.
However, the empty land block should be purchased exclusively for the fund trustees’ or their dependents’ benefit—similar to how other assets are purchased through the SMSF. You can determine your land block’s eligibility via the “Sole Purpose Test.”
This test guarantees that the fund’s trustees make decisions that benefit their fellow trustees, such as retirement instead of short-term profit. Taking the “Sole Purpose Test” prevents misuse and personal gains of the trustees or their business partners, friends, and family members.
How does the Australian Taxation Office (ATO) determine vacant land?
The Australian Taxation Office’s (ATO) criteria for vacant land includes:
- The land did not contain a considerable and permanent structure.
- The land has a considerable and permanent structure. However, it is a residential structure built or substantially renovated while the entity holds the land. Furthermore, the residence should be deemed unlawful for occupancy. If the structure is considered fit for occupancy, it either hasn’t been rented out or made available for leasing.
If a brand-new or renovated residence is still awaiting further approval or hasn’t been leased, the ATO can still consider it vacant. Conversely, the situation involves a block of land missing a substantial and permanent residential or commercial structure.
The ATO’s definition of “substantial and permanent structure” includes buildings and other structures built on land that meet the following criteria:
- The structure has considerable size and value.
- Unrelated to the function of another building or planned structure on the property.
- Unrelated to, dependent on, or exists to complement another structure’s function.
- Permanent and long-lasting.
The ATO considers your typical residential or business structure as substantial and permanent. Less prominent structures under the same category may include the following:
- Commercial parking garages.
- Woolsheds.
- Grain silos.
- Farming homesteads.
The Australian government does not consider a structure substantial and permanent if it has value as an extension of an existing structure. These include the following:
- Residential garages or sheds.
- Letterboxes.
- Pipes and powerlines.
- Home landscaping.
Can I borrow funds from my SMSF to buy property?
You can borrow funds from your SMSF to purchase property. However, please remember that you must meet specific requirements, including the following:
- The borrowed funds must secure a “Single Acquirable Asset.”
- You must borrow the funds under a “Limited Recourse Borrowing Agreement” (LBRA).
- The asset is preserved in a “Bare Trust” or a “Property Trust.”
- The self-managed super fund has the exclusive right to inherit legal ownership of the asset bought from the property trust after the SMSF has repaid any outstanding loans.
- If no improvements are made, an SMSF can use the loan to repair and maintain the property.
- An SMSF cannot buy properties from a “Related Party.” The sole exception is purchasing property from a “Real Business Property” acquired at market value.
How much can a SMSF borrow to buy property?
An SMSF can borrow a minimum of $100,000. However, this depends on the fund’s loan eligibility and the lender’s consent. Some lenders loan as much as $4,000,000.
Lenders also consider a property’s loan-to-value ratio (LVR) when lending funds to an SMSF. An LVR represents the proportion of the loan amount compared to the property’s value. Higher deposits result in a lower LVR, a low-risk strategy for the lender. The optimum LVR for SMSF limited recourse borrowing may differ among lenders.
Some lenders offer 80% LVR property loans. In this scenario, the lender can provide 80% of the property’s value and oblige the trustee to settle the remaining balance through his SMSF.
Please contact us today if you need assistance with SMSF property issues. Our highly skilled and experienced tax professionals will help you make prudent, long-term investment decisions.
