Self-Managed Super Funds (SMSF) give individuals more control and flexibility over investment decisions. If you are already a trustee of an SMSF, you may have considered investing in real estate or property to diversify your assets, which leads us to the question — can a self-managed super fund buy vacant land in Australia?
Yes, an SMSF may be used to invest in a range of property types including vacant land. However, a SMSF can only borrow money to buy property under a Limited Recourse Borrowing Arrangement (LRBA) and that comes with a set of rules. LRBA funds can’t be used to make improvements to the asset, and changes can’t be made which alter the fundamental character of the asset until after the loan is paid off. Therefore, vacant land is an uncommon investment strategy for SMSFs because development is rarely possible.
Understanding the rules governing SMSFs and the purchase of properties such as land can be very daunting, especially to those who are unfamiliar with super funds. As such, getting advice from an expert in the field is definitely a good step to take before making any concrete self managed super fund investment plans. However, to get you started, we’ve compiled a list of the most commonly asked questions about SMSFs and buying land as an investment.
Can I Use My Super to Buy a Block of Land?
Yes, if you have an established Self Managed Super Fund. If you’re currently using a retail or industry super fund, you can’t make specific decisions about investments or directly purchase an asset with your super balance.
On the other hand, SMSFs exclusively allow for direct property investments, which aren’t possible through APRA-regulated super funds. If you’re already a SMSF trustee, so long as the Trust Deed allows it, purchasing real property such as land is a possibility.
However, much like any other assets purchased through the SMSF, the block of land should be for the sole purpose of benefiting the Fund trustees or their respective dependents. This can be determined through what is known as the ‘Sole Purpose Test’.
The intention of the test is to ensure that trustees of the Fund are making decisions that are in the best interest of the Fund trustees, and this must be in the context of retirement, not short-term financial gain. This prevents the SMSF from being misused for the current personal interests of any of the trustees or their related parties (business associates, friends and relatives).
What is Considered Vacant Land?
When we’re talking about financial matters, the most important definition of ‘vacant land’ is what the ATO states. According to them, land is considered vacant during the period in which an entity is holding it under the following conditions:
- The land did not contain a substantial and permanent structure
- The land contains a substantial and permanent structure, and the structure is a residential premises which was constructed or substantially renovated while the entity held the land and the premises are either:
- Not yet lawfully able to be occupied
- Lawfully able to be occupied but not yet rented or made available for rent
Essentially, if a newly built or renovated home can’t be lived in yet (i.e. it’s awaiting approvals) or hasn’t yet been rented out, it can still be considered ‘vacant’. Otherwise, we’re discussing a block of land without a substantial and permanent structure, residential or commercial.
The ATO defines a substantial and permanent structure as a building or other structure constructed on the land which is:
- Significant in size or value
- Not incidental to the purpose of another structure or proposed structure on the land
- Not related to, reliant on, or exist to support the use or function of another structure
- Fixed and enduring (not built for a temporary purpose)
Of course, your average residential or commercial building will count as a substantial and permanent structure. Less obvious structures which are considered substantial and permanent may include commercial parking garages, woolsheds for shearing and baling wool, grain silos, as well as homesteads on farming properties.
On the other hand, a structure is deemed not substantial and permanent if it only has value as an addition to another existing structure. Examples of these are residential garages or sheds, letterboxes, pipes and powerlines, and residential landscaping – all of which play a ‘supporting’ function to a main building, but don’t have much significance without one.
Can a SMSF Borrow Money to Buy Property?
Yes, thanks to fairly recent legislative changes, it is possible for a self-managed super fund to borrow money in order to purchase property. However, keep in mind that there are certain conditions that have to be met in order to allow SMSFs to purchase direct properties through borrowing. These conditions are:
- The borrowed funds shall be used to acquire what is known as a ‘Single Acquirable Asset’;
- The funds used to purchase the asset must to be borrowed under a ‘Limited Recourse Borrowing Arrangement’ (LRBA);
- The purchased asset is held in a specially designed trust known as a ‘Bare Trust’ or a ‘Property Trust’;
- The SMSF only has the right to acquire legal ownership of the purchased asset from the property trust upon repayment of any outstanding loan;
- The borrowed funds can used to conduct repairs and maintenance, as long as no improvements are made to the asset;
- An SMSF is not allowed to purchase properties from a ‘Related Party’ unless it is considered as a ‘Real Business Property’ which was acquired at market value.
Now, this is a lot to take in, so let’s unpack what each of those terms means.
Single Acquirable Asset
A Single Acquirable Asset is a single object of property, such as residential properties, apartments, or even a block of vacant land. To make things more complex, this type of asset can sometimes encompass two legally separate assets, treated as one asset for the purpose of borrowing through an SMSF. This usually occurs when two assets are inseparable, such as an apartment with its own car park which are on separate titles but cannot be separately sold.
Another example of this are assets that were acquired under a single contract, such as house and land packages.
There are two particular mistakes that are commonly committed by SMSFs when using borrowed funds to purchase property:
- Constructing a house on an existing block of land which is already owned by the SMSF. Houses are not considered a Single Acquirable Asset in their own right, and funds that were borrowed to construct a house are used to buy contractors’ services and building materials, instead of a Single Acquirable Asset. All these individual elements that go into building a structure are perceived as many assets, and that’s off-limits.
- Buying a serviced apartment, because only an apartment without furniture is considered a Single Acquirable Asset. In practice, even if an SMSF decided to purchase an apartment with a furnishings package under the one contract, it still does not constitute a Single Acquirable Asset. In fact, even if the SMSF decides to purchase the furnishings under a different and separate contract, it would still be multiple assets and as such, fails to qualify as a Single Acquirable Asset.
Looking back at the exceptions we mentioned earlier, these patterns do make sense – if a house isn’t built yet, the building materials and tradespeople’s labour aren’t inseparable from the land itself. Similarly, furniture can easily and legally be separated from the apartment itself, even if it’s convenient to roll it into the one contract.
When a SMSF borrows funds to purchase direct property, it must be for the purposes of a Single Acquirable Asset – but there are some options if you can fund additional assets through other means, and we’ll discuss some of those later.
Limited Recourse Borrowing Arrangement
A Limited Recourse Borrowing Arrangement (LRBA) is an agreement between an SMSF trustee and a third party lender. Through an LRBA, any kind of recourse that the third party lender or any other individual may have against the SMSF will be limited only to the asset, as well as any rights to the asset (such as rent) which the SMSF borrowed funds to acquire.
The only way a SMSF can borrow funds for direct property is under a Limited Recourse Borrowing Agreement.
Bare Trust and Property Trust
There are unique trust structures which are used to split the legal and beneficial titles of an asset. Through these trusts, the beneficiary (such as the SMSF) has the beneficial rights to both capital and income of the asset. Despite this, the SMSF will not hold any legal title, and will only be entitled to one upon complete repayment of the money borrowed.
Repairs and Maintenance to the Asset
As we have previously mentioned, an SMSF trustee is allowed to borrow funds for repairs and maintenance of an asset acquired through borrowing funds, regardless of whether it was done right after its acquisition or not. Repairs are defined as the restoration of any function of the asset without changing its character. This may include restoration of its former appearance, form, state, or condition.
On the other hand, maintenance or ‘maintaining’ refers to any work conducted in order to prevent damage, defects, or deterioration of an asset. Maintenance may also be conducted in anticipation of future damage or deterioration, as long as the work solely ensures the asset remains functional.
Improvements to the Asset
As stated above, improvements to the asset through borrowed funds via an LRBA are not allowed. This means the loan can’t be used to make renovations or to build a new structure on land you’ve purchased. If you’re buying vacant land through a SMSF, any development will need to be funded separately to your LRBA. However, funds coming from other sources are allowed to be used on improvements.
It should be noted, though, that improvements can’t result in the asset turning into a ‘different asset’. If any improvement will change the fundamental character of the asset as a whole, then it will result in a technically different asset held in trust under the LRBA. For instance, a residential property and a commercial property would be considered different assets, so improvements of this nature aren’t allowed. Specifically it would constitute a violation of Australia’s superannuation laws, outlined in the ATO’s Self Managed Superannuation Fund Ruling (SMSFR) 2012/1.
What’s the purpose of these laws? Basically, it’s designed to keep the SMSF out of sticky situations. If the SMSF can’t meet the payments and the lender seizes the asset – say, a block of land – it’s a bit of a challenge if the SMSF has already built a block of units on it.
Any big changes to the property make a default much more complicated, since the lender only has recourse to the original asset. So until the LRBA is fully repaid, any improvements must not fundamentally change the asset. Where does this line fall? It’s always best to consult an expert to ensure you’re sticking to the law.
Can a SMSF Buy a Block of Land From Family or Friends?
No, SMSFs are not allowed to purchase any kind of property from Related Parties, which includes family and friends. The only exception to this rule is when the asset is categorized as a Business Real Property.
Let’s look at the definitions of these terms.
A ‘Related Party’ is:
- a member or trustee of the SMSF
- a relative of the member or trustee
- an entity that the trustee or member controls
- or an employer who pays into the SMSF.
Business Real Property
This is real estate used exclusively for business purposes. In an exception to the rule, SMSFs are allowed to acquire business real properties from related parties so long as it is acquired through market value.
Can a SMSF Build on Vacant Land?
No, an SMSF cannot build on vacant land. Taking into account very specific exceptions, SMSFs are only allowed to borrow to acquire a Single Acquirable Asset. Building on vacant land is considered an improvement to the asset (the vacant land), which is strictly prohibited.
Can I Buy Rural Property With My SMSF?
Yes, SMSFs can be used to purchase rural properties so long as the following key criterias are met:
Is The Rural Land Considered Business Real Property?
As previously mentioned, Business Real Property pertains to land and structures used exclusively for an operating business. If the rural property is used for the purpose of a business such as a farm, it’s considered Business Real Property even if it includes a private or domestic dwelling. However, this dwelling must be on no more than two hectares of land, and the farm business should be the primary purpose for purchasing the land, not residential or domestic purposes.
Does The Rural Land Meet Your SMSF’s Investment Strategy?
SMSFs have a formalised investment strategy which governs the fund’s investment objectives. It also specifies the kinds of investments that your SMSF is allowed to make. This strategy has to be in writing and must:
- Be regularly reviewed to make sure that it reflects the current purpose and circumstances of the fund and its trustees (the reviews and any decisions that may modify the strategy should be documented).
- Consider if you should hold an insurance policy for each trustee of your SMSF.
The bottom line is, the purchase of the rural property which is to be Business Real Property (for example, a farm) must be a component of the SMSF’s investment strategy.
Sole Purpose Test
As initially mentioned in this article, the Sole Purpose Test will determine if the purchase and maintenance of the rural land will be for the sole purpose of providing retirement benefits to the trustees, as well as their dependents should they pass away before retirement. Even rural properties and farm’s can’t be operated for present-day benefit of trustees or their related parties.
Things to Consider When Using a SMSF to Buy Land
Vacant Land Tax
If a vacant land includes residential premises, then deductions for expenses are not permitted until the residential premises are leased, licensed, hired, or made available for these purposes.
The rules may be applied to deny an SMSF a tax deduction for holding costs when the fund purchases blocks of land where a building or structure is intended to be built.
Limited Deductions For Vacant Land
The Treasury Laws Amendment (2019 Tax Integrity and Other Measures No 1) Bill 2019 was brought about changes to taxes involving vacant land. In particular, the new legislation removed tax deductions claimable for owning vacant land in specific scenarios.
Entities and taxpayers with specific circumstances will still be allowed to claim deductions for costs incurred in holding vacant land. An example of this is when the entity who holds the land is a company, and that land is used to to operate a business.
If the business use of your premises or land has been suspended due to COVID-19 restrictions, deductions for holding costs are not limited if either the premises or land remain available for use.
Can I Live in my SMSF Property When I Retire?
You cannot purchase a property with your SMSF to live in while you are still employed or working. However, it is permitted to to live in it once you are fully retired.
This essentially means that you are allowed to purchase an investment property through your SMSF, but you will only be able to live in it yourself when you are retired. Prior to full retirement, you may rent out the property to unrelated third parties at market value. Family and friends also can’t rent out the property in the meantime.
What Type of Property Can a SMSF Buy?
So long as it meets the prerequisites such as the Sole Purpose Test and the SMSF’s investment strategy, SMSFs can purchase residential or commercial properties, as well as land. However, borrowing to purchase land is only possible through a LRBA (Limited Recourse Borrowing Agreement) and for a Single Acquirable Asset. A structure and and may be considered a single asset for these purposes, as are any assets that cannot be sold separately.
This article is provided as general information only and does not consider your specific situation, objectives or needs. It does not represent financial advice upon which any person may act. Implementation and suitability requires a detailed analysis of your specific circumstances.
Matthew has a wide ranging background in business, finance, taxation and accounting with over 25
years’ experience, firstly as an Accountant before becoming a Financial Planner. Matthew has been in
the Financial Planning Industry since March 1998 and has been the principal of his own financial
planning practice since 2003.
Matthew has studied a Bachelor of Commerce degree from Newcastle University majoring in Financial
Accounting and the Diploma of Financial Planning from Deakin University. Matthew is a Registered Tax
Agent and is a member of the National Tax & Accountants Association (NTAA).
Matthew has particular expertise in the areas of retirement planning, superannuation, investments and
insurance. His emphasis is on building a professional, integral and lasting relationship with clients with
the objective of assisting them to achieve their financial and lifestyle goals.