- SMSFs generally can't borrow to buy land and build on it due to restrictions on how SMSF loans can be used.
- An SMSF can buy land (with cash or a loan) and can purchase completed or off-the-plan properties under a single contract, but it cannot use borrowed funds to improve a property or construct a home on land it already owns.
- Except for a few narrow scenarios, building is typically only possible when an SMSF uses its own cash.
The Australian Taxation Office (ATO) determines that SMSFs can only borrow to buy singular assets, and buying land to build doesn't fit into this very neat definition. Under tax law, the land is one asset and the contract to build is another, then, once construction is complete, the house and land is considered a different asset entirely. Not to mention, SMSFs typically aren't eligible for construction loans.
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If your SMSF has enough wealth to buy land and build a house outright or pay off any loan taken out to buy the land before engaging a builder, it might be able to build a new property.
SMSF trustees considering investing their retirement savings in a building that's yet to be constructed would likely be wise to seek expert advice.
Can an SMSF buy land?
An SMSF is generally permitted to buy vacant land with or without an SMSF loan. The ATO considers land vacant if:
It doesn’t contain a substantial and permanent structure
It contains a substantial and permanent structure for residential purposes which was constructed when you held the land and isn’t legally allowed to be lived in or made available for rent.
Unless your SMSF is using cash to buy land, it will need to borrow money to do so. But, to get a loan as an SMSF you need something called a limited recourse borrowing arrangement (LRBA). This provides protection for your fund, ensuring that if your SMSF defaults on its loan, its lender has 'limited recourse' and can only reclaim the asset the loan was used to purchase.
The reason this can cause challenges for funds wanting to build a new investment property is due to the fact an LRBA can only be used to purchase a ‘single acquirable asset’ (or a collection of identical assets with the same value, like a parcel of shares purchased together).
Can an SMSF buy land and build?
An SMSF cannot borrow to buy land and build due to the rules around LRBAs. When an SMSF borrows money, it can only purchase a single acquirable asset, or one with a single title. The ATO judges the land and the building contract as separate assets. Similarly, an SMSF can't borrow money to make improvements to an existing property.
Additionally, when an individual buys land and builds on it, they'll likely do so using a construction loan. Construction loans see the loan divided into stages based on the build's progress, and SMSFs generally aren't eligible for construction loans.
Are there alternative options for SMSFs wanting to build a house?
If an SMSF desperately wants to use borrowed funds to buy land and build property, there is somewhat of a loophole in the restrictions:
An SMSF may be permitted to buy an off-the-plan house or apartment if the contract for buying the land it's built on and the building are one and the same. Some builders might offer this as an option, while other specialty services exist to make it a possibility. An SMSF may also be able to buy a newly built home that hasn't been sold before.
As as far as other alternative options go, SMSFs are able to purchase established properties using an LRBA. Typically, lenders will require you to have at least a 20% deposit for the purchase of residential properties and in some cases a 30% deposit if buying a commercial property.
Of course, an SMSF likely could build a new house on a block of land if it could afford to do so without borrowing money.
What to consider prior to buying land with your SMSF
If you’re thinking of buying land with your SMSF, it’s important to consider a number of things prior. It’s vital you consult the trust deed of your SMSF to ensure the purchase of the land is permitted and in the best interests of members' retirement. Provided the purchase passes this test, consider asking yourself the following questions:
Will the land produce any income for the SMSF and if so, how much?
Is the income the land produces better than a less risky investment or a savings account?
Will the land increase in value and if so, by how much?
Have you considered the costs the land will incur like land tax and council rates? How much will these cost the fund?
Does the income outweigh the costs? If not, how long will it take to turn a profit, if at all?
How would the land be dealt with if a member died or the fund needed to be wrapped up?
Looking to take control of your retirement? This table below features SMSF loans with some of the most competitive interest rates on the market.
Lender Home Loan Interest Rate Comparison Rate* Monthly Repayment Repayment type Rate Type Offset Redraw Ongoing Fees Upfront Fees Max LVR Lump Sum Repayment Extra Repayments Split Loan Option Tags Features Link Compare Promoted Product Disclosure
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