Can I Buy a Block of Land with My SMSF (Self Managed Super Fund)?

by | Oct 19, 2023 | Uncategorized

A self-managed super fund gives an individual more control and versatility over their investments. You may have considered using this freedom to purchase property with your super fund, but how does this work exactly? While it’s certainly possible to use your SMSF to purchase land or an investment property, there are some strict rules and restrictions you need to be aware of before you put anything into action. So let’s run through the dos and don’ts of buying vacant land with an SMSF fund and see whether this investment property is the best option for you.

What is a Self-managed superannuation fund?

A self-managed super fund (also known as an SMSF) is a trust that can have up to four contributing members, but most commonly only has two (for example, a husband and wife). To manage this fund, a trustee must be nominated who will have the ultimate say over how funds are managed and how superannuation assets and investments are made throughout the various

Are you able to use SMSF to buy land?

The short answer is yes, but there are rules. Your SMSF can be used to invest in the property market, such as vacant land, however, you can only buy property under the rules of a Limited Recourse Borrowing Arrangement (LRBA). You can purchase commercial property or residential properties or vacant land, so long as they pass a sole purpose test and follow the rules of a LRBA.

We should make clear that retail super funds and industry super funds cannot be used to purchase land, as they lack the flexibility offered by self-managed funds.

What are the rules and regulations on using SMSF for property investments?

Under the rules of an LRBA, the borrowed funds from your SMSF can’t be used to improve a property or increase the value of the asset purchased, rather they can only be used to make the initial purchase. Changes can’t be made that alter the fundamental, defining characteristics of the block until after you’ve made all your loan repayments.

Some conditions you need to be aware of include:

  • The funds you receive can only be used to purchase a single acquirable asset
  • These borrowed funds must be acquired under the rules of a Limited recourse borrowing arrangement
  • Your purchase property or asset will be held under what is known as a ‘Bare Trust’ or ‘Property Trust’
  • You can use acquired funds to make repairs and perform maintenance, but you cannot improve the assets (make renovations).
  • The SMSF cannot be used to purchase property from a related party unless it is proven to be a Business real property. A related party is anyone including a friend, family member, business partner or em

If you wish to make renovations, this must be funded by a source other than the loan you received through your SMSF.

What is the process when using SMSF to buy a block of land?

Depending on the property you’re interested in and how much money you have in your SMSF, you might be able to purchase the property outright without having to borrow money. However you choose to purchase your block, you need to follow the guidelines of a Limited recourse borrowing arrangement. It’d also be wise to consult a financial advisor to make sure this scheme will work for you.

What is the process when using SMSF to build a new property?

An SMSF cannot be used to contribute to a build as this is considered to improve an asset which is strictly against regulations.

Are there any specific rules and guidelines when building with SMSF?

Obviously, if you’re purchasing vacant land with your SMSF, you’re planning to eventually build upon it. This is allowed, so long as the funds you’re using to achieve this are not from your Self Managed super funds. Instead, you’ll either need to dip into your savings account or obtain another loan

Can I live on the property I purchase?

Yes, but only when you’ve fully retired. You cannot live on a property you’ve purchased through your SMSF if you’re still currently working.

What are the different financing options when funding the construction of land within your SMSF?

When it comes to the construction itself, you’ll need a second loan to pay for any building costs as these expenses cannot come out of your SMSF loan.

The best option is a construction loan which, as the name suggests, is specifically designed for building a house. The borrowed money will be paid in instalments to cover various stages of the building project.

What is a construction loan and how does it work? We’ve written an entire page on the subject so why not give it a read by clicking here!

What are the tax implications of buying a block of land and building within your SMSF?

Depending on your circumstances, purchasing property with your SMSF may make you eligible for some tax deductions. What will be tax deductible can vary from state to state and from situation to situation so be sure to talk to a financial advisor.

After you’ve owned the property for a year, you may be entitled to extra tax exemptions.

Once you reach the age of sixty, you’ll be exempt from having to pay any capital gains tax for the property. This is great news for your profits.

What are some of the key benefits of an SMSF property?

  • Can help contribute to residential property which you can use to get rental income or eventually sell.
  • Use your retirement benefits to get into the property market through a residential investment property.
  • Property investment tends to be a more stable investment than stocks. While you won’t get rich overnight, you are much less likely to see your investment crash in value the way the stock can.
  • In New South Wales, you may be tax-exempt due to property being a fixed asset. Talk to a financial advisor to confirm this.

Are there any risks to buying land and building using an SMSF?

  • Financial institutions, such as your bank or mortgage broker will flat out not allow you to borrow money through your SMSF unless you have at least $200,000. This means it won’t be a viable option for everyone.
  • Property is a non-diverse investment compared to stocks, so you’re putting all your money in one basket. Great if it pays off, not so much if it doesn’t.
  • To make a profit, you don’t just need to cover the cost of the property. There will be other costs such as SMSF setup costs, land stamp duty, legal costs, real estate agent fees, etc.
  • There is always an element of risk with investments. Your retirement savings could take a serious hit if things don’t pan out as you’d like and it’s important you have plans for this possibility.
  • All loan repayments have to be able to be covered through the SMSF. If your super fund fails to cover repayments, your lender can sell your land. They cannot touch your other assets though.

Need more advice on using SMSF to build your new home? Talk to an experienced building broker for free


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