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.
Key Takeaways
- A self‑managed super fund can buy vacant land if the fund’s structure and investment strategy allow it.
- Vacant land must be acquired for the sole purpose of providing retirement benefits, not for personal use.
- To use borrowed funds, the SMSF must set up a Limited Recourse Borrowing Arrangement in compliance with super laws.
- SMSFs cannot use LRBA funds to improve or develop the land until the loan is fully repaid.
- Professional tax and investment advice is strongly recommended before proceeding with an SMSF land purchase.
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.
Frequently Asked Questions
Can you buy land using SMSF?
Yes. A Self-Managed Super Fund (SMSF) can purchase land, including vacant land, provided it complies with superannuation rules, the fund’s trust deed allows it, and the investment is made for the purpose of providing retirement benefits.
Can I live on a farm owned by my SMSF?
No. Trustees and related parties cannot live on or personally use any property owned by an SMSF, including a farm. All property must be held strictly for investment purposes to benefit the fund members at retirement, not for personal use.
Can I transfer property from my SMSF to myself?
Transferring property from an SMSF to yourself is generally not permitted without meeting strict conditions. Such a transfer could breach superannuation rules and may result in tax and penalty consequences. Transfers may only occur under approved scenarios, such as taking the property as a benefit at retirement or preservation age.
Is it worth buying property through SMSF?
Using an SMSF to invest in property can be a long-term strategy to grow retirement savings. However, suitability depends on the fund’s circumstances, investment goals, and ability to meet ongoing costs. Please note, this is educational information and not personal financial advice.
What property can I buy in my SMSF?
An SMSF can purchase various types of property if the acquisition complies with superannuation rules. This includes vacant land, residential investment property, commercial property, and business real property. Purchases must be at arm’s length and for genuine investment purposes.
How to avoid capital gains on SMSF property?
Managing or minimising capital gains tax (CGT) when selling SMSF property depends on the fund’s circumstances. For example, CGT may be reduced or nil if the fund is in pension phase. Strategies should be discussed with a qualified tax professional.
Can I buy a property in my SMSF and live in it?
No. You cannot live in a property owned by your SMSF. All property must be held strictly for investment purposes and cannot be used as your personal residence.
Can I rent a house owned by my SMSF?
Yes. A property owned by an SMSF can be rented out, but it must be rented at market rates to unrelated tenants. Renting to yourself or related parties below market value is not permitted.
Important information
The information provided on this page is general in nature and has been prepared without taking into account your objectives, financial situation or needs. It is not intended to constitute financial advice, investment advice, or a recommendation in relation to any particular superannuation or SMSF strategy.
Superannuation and SMSF rules are complex and subject to change. You should consider whether the information is appropriate to your circumstances and seek independent financial, tax or legal advice before acting on it.
TW Accounting does not hold an Australian Financial Services Licence (AFSL) and does not provide financial product advice.
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.
