Can I use my super to buy land?
Your self-managed super fund (SMSF) can buy vacant land as part of its portfolio. Like any other SMSF asset, it must be in line with the fund’s investment strategy, and the trust deed must allow it, not prohibit it.
One of the most important questions is why your fund should acquire the land. The purchase of the land cannot provide a present-day benefit to any of its members. The acquisition must be for the sole purpose of providing retirement benefits to its members or death benefits to their beneficiaries.
Can my SMSF buy land and develop it?
It depends. There are no specific superannuation laws or regulations prohibiting an SMSF from developing property. However, many complex rules can impede SMSF property development or render it unattractive. A major consideration is whether an SMSF has sufficient funds to undertake a development.
Acquiring land and developing it without borrowing
Land development should not be undertaken lightly within an SMSF. The Australian Taxation Office (ATO) has signalled its concerns about SMSFs and property developments discussed at the SMSF Regulator’s Bulletin (SMSFRB 2020/1). There are a lot of rules, apart from the usual rules mentioned above, to be considered, which include:
Non-Arm’s Length Income (NALI) – the taxation laws impose a penalty tax of 45% on income derived as a result of related party dealings where the income is higher than otherwise expected if the parties were at arm’s length. Non-arm’s length expenses (NALE) have expanded NALI to include circumstances where expected expenses are lower than otherwise expected when dealing with related parties.
Example – Using your own building company to develop the land owned by your SMSF
James is in the land development business and also has an SMSF. He wants to build up his retirement benefits by having his SMSF purchase land, and his company provides development services at a 50% discount. The contract is with a related party, and the expenses are substantially lower than those a third party would incur. Therefore, this arrangement falls under the NALI provisions, with 45% tax imposed on the net rent and the capital gain on disposal included in NALI and potentially taxed at 45%.
Acquiring vacant land from an SMSF member or related party –Generally, vacant land cannot be acquired from an SMSF member because it does not fall within one of the exceptions, such as business real property.
However, a land developer with a stockpile of land may be able to sell vacant land that is part of their business to their SMSF, as the land may be considered business real property in these circumstances.
An SMSF’s property cannot be subject to a charge, it is not uncommon for a land developer to place a charge over the asset during the construction stage, but this is prohibited under the super laws.
Can my SMSF borrow to buy land?
An SMSF can use a limited recourse borrowing arrangement (LRBA) otherwise known as a Bare Trust to buy land that is a single acquirable asset.
It can be acquired only from you or another related party if the land is used “wholly and exclusively” in your business, such as a land development business, a primary production business, or a business that uses the land for parking.
Acquiring vacant land from an unrelated third party is generally acceptable and constitutes a single acquirable asset if it is held under a single title.
Restrictions on holding land in a Bare Trust under an LRBA
The acquisition of land is a single acquirable asset and, therefore, developing land whilst it is subject to an LRBA does not meet the eligibility requirements. Developing land by building a block of units, a medical practice, or another type of building changes the character of the land. The asset is no longer the subject of the original arrangement and would fail to satisfy section 67(1) of the SIS Act.
Can my SMSF build on vacant land after the borrowing has been repaid?
Once the borrowing on land financed with an LRBA has been fully repaid, the land can be developed after it has been transferred from the bare trustee back to the SMSF.
Can my SMSF borrow to develop land after it has been transferred back to my SMSF?
No. The basic tenet of an LRBA is that the fund acquires a single asset. This requirement is not met if the asset is already held by your SMSF. Building a residential building on the land means the house is an acquisition of services and building materials, and is not part of the original single acquirable asset.
Restrictions on borrowing to buy land?
The SIS Act allows an SMSF to acquire land by borrowing under the LRBA rules, provided it does not breach other SIS requirements. However, banks and lenders may be less willing to lend on a non-income-producing asset. Land leased for agistment for primary production purposes, or for use as business parking, may be viewed more favourably. A lender needs evidence that the SMSF can sustain the borrowing, including the contribution history and ages of the members, the fund’s income and expenses, the potential for future capital gains, and the market for the land.
Can my SMSF buy land with a derelict house on it?
Generally, where the building is derelict, uninhabitable, cannot be improved, and has no significant value, the land would likely be treated similarly to vacant property. Therefore, if using an LRBA to finance it, your SMSF would need to ensure that any costs associated with demolishing it for redevelopment are not incurred until the loan is repaid and the land is transferred back to your SMSF.
Can an SMSF participate in land banking?
Land banking involves buying vacant, undeveloped land and holding it with the expectation that its value will appreciate over the medium- to long-term. An SMSF can certainly buy vacant land and hold it for the medium to long term to realise capital gains as part of its investment strategy. However, investors are often reliant on future events, such as rezoning due to changes in land use, infrastructure upgrades (such as highway construction), and urban expansion, to realise large profits, which makes this approach very risky. Another major concern for an SMSF is that the strategy is not income-producing, and cash flow could be an issue, as the fund has to cover holding costs for many years and must still meet its requirements to pay fund expenses, especially if the fund provides pensions to its members. Financing this type of investment is probably more suitable for a fund with readily available cash, as obtaining borrowed funds would be much more difficult.
Land banking is legal, but many local councils scrutinise the practice when land is left undeveloped for extended periods. The Australian Government is cracking down on foreign investors, imposing strict regulations on undeveloped land to ensure they are not holding onto land without developing it.