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Buying land and building with an SMSF

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If you’re considering using a Self-Managed Super Fund (SMSF) to purchase a property or block of land, there are a few hoops you may need to jump through to end up with a successful transaction.

Find out whether it can be done in the first place, how it works, and what to consider.

Can an SMSF buy a block of land?

Yes, you can use an SMSF to buy land so long as the Trust Deed allows it.

Much like any other asset purchased via an SMSF, the block of land should be for the sole purpose of benefiting the trustees (this must be in the context of retirement, not short-term financial gain) or their respective dependents. Typically, this can be determined though the Sole Purpose Test.

To get a loan as an SMSF, a limited recourse borrowing arrangement (LRBA) is required. LRBA essentially means in the event of default, a lender can’t go after other assets as part of the SMSF, such as shares or cash - it can only seek to recover against the house. A separate trust and trustee (a custodian) is created which essentially provides the SMSF with a safety net in the event you can no longer repay the loan. The custodian holds the property title on the trustee’s behalf until the loan has been paid off completely.

With an LRBA, it must be properly structured otherwise you could face fines of over $200,000 if done incorrectly. If you’re going down this avenue, it’s strongly recommended to talk with legal and financial advisors to help you through the process.

What to consider when buying land through an SMSF

Before you consider buying land with a SMSF, you need to ensure the purchase of the land is in the trust deed and is in the best interest of the trustee’s retirement.

Other factors you may want to take into account mostly centre around the income and value of the land. For instance, will the land produce any income, if at all? Will the land increase in value? What will land tax costs and council rates cost you? How long will it take to turn a profit? If a member passes away, is there an exit strategy in place?

Can I build a house with an SMSF?

The short answer is no, you cannot build on vacant land with an SMSF.

With an LRBA, you are only allowed to purchase a ‘single acquirable asset' or one title. Building a house on vacant land is considered multiple titles by the ATO (one for the land and one for the build), which is strictly prohibited.

Further, you are restricted from using borrowed money to make improvements to a single acquirable asset such as making repairs, changing the nature of a home (structural changes), and demolishing a home to rebuild.

What is a Single Acquirable Asset?

As previously mentioned, a single acquirable asset can be a single asset or collection of identical assets that have the same market value under one LRBA. To be considered a single acquirable asset, a collection of assets must be bought and sold together.

Some examples of a single acquirable asset include:

  • A property on a single title
  • A collection of shares of the same class in a single company
  • A collection of units that have the same fixed rights in a trust that are bought and sold as a single unit

Can an SMSF buy land from family or friends?

The only instance where you’re able to buy land or property from a family member is if it’s classified as ‘business real property.’ Otherwise, SMSFs are not allowed to purchase any kind of property from related parties i.e. friends and family.

In a nutshell, business real property means that a property is used exclusively by a business - for example, a factory or a shop. However, a shop that has a residence upstairs normally doesn’t qualify as it isn’t used “wholly and exclusively” by the business. Vacant land typically doesn’t make the cut either, unless the property in question is a farm with some empty paddocks.

If an SMSF was to purchase a property from a member or their family trusts this would be considered a related party. Thus, the property would need to be classified as business real property.

If the trustee then wishes to rent the property out to a related party, while possible, it must be for business real property purposes.

What are the other SMSF loan options?

At loans.com.au, we can help you with all your SMSF home loan needs, including both the purchase of a new residential investment property, and the refinance of your existing SMSF loan. We don’t offer SMSF loans for land only.

An SMSF can be used to buy a residential property, however there are a few rules to consider first:

  • A trustee or anyone related to the trustee, cannot live in a residential property that you have purchased through the SMSF
  • A trustee or anyone related to the trustee, cannot rent the property purchased through the SMSF
  • The SMSF cannot buy a property owned by a trustee or anyone related to the trustee
  • The purchase must meet the ‘sole purpose test’ of solely providing retirement benefits to fund members

If you’re in need of refinancing to a low-rate SMSF loan for a residential property, contact one of our friendly lending specialists today to help you settle quickly and save thousands.

About the article

As Australia's leading online lender, loans.com.au has been helping people into their dream homes and cars for more than 10 years. Our content is written and reviewed by experienced financial experts. The information we provide is general in nature and does not take into account your personal objectives or needs. If you'd like to chat to one of our lending specialists about a home or car loan, contact us on Live Chat or by calling 13 10 90.

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