Can I Use My Super to Buy Land?

It is possible to use your superannuation to purchase land.

Your super fund’s investment menu and investment strategy will determine how you can invest your super.

For ordinary Industry Super funds or Public Offer fund, the investment menu is somewhat limited.

You are unable to buy land within Industry or retail super accounts.

In saying this, you are usually able to get property exposure via one or more investment options or managed funds within the super account’s investment menu.

If you would like to purchase a specific piece of land with your super, you will need a Self Managed Superannuation Fund (SMSF).

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The range of assets you can invest in within a SMSF is only limited by legislation and the SMSF’s investment strategy document.
 

Can I Use My Super to Buy Vacant Land?

 
In order to use your super to buy vacant land, you will need to establish a SMSF.

Your decision to setup a SMSF should not be taken lightly, even if you are excited about purchasing land.

Compared to Industry and retail super funds, a SMSF generally has much higher costs.

However, SMSF costs are often fixed costs; unlike Industry or retail accounts, which tend to be percentage based.

Therefore, if you have a high super balance (say, $1M+), a SMSF can be more affordable.

Not only are there high establishment and ongoing costs associated with a SMSF, but there are also many legal and administrative responsibilities.

As trustee of a SMSF, you need to be fully aware of all of your obligations.

It is also highly recommended to seek professional advice to assist in setting up and running the SMSF.
 

Should I Use My Super to Buy Vacant Land?

 
Any investment made within a SMSF needs to be made for the sole purpose of benefiting members or their dependants.

The Sole Purpose Test outlines a number of core and ancillary purposes that the SMSF needs to be maintained for.

It is also important to understand that a SMSF is generally unable to purchase assets from a related party, unless it is Business Real Property or listed equities.

Vacant land is unlikely to meet the definition of Business Real Property.

Further, all transactions must be made on an arm’s-length basis.

Assuming you are looking to purchase land from a third-party on an arm’s-length basis for the benefit of SMSF members; is it really a good idea?

Purchasing land could be a good idea, but it is important to consider everything first.
 

Things to Consider When Using Super to Buy Land

 
Firstly, if you are buying vacant land, you need to be realistic about the net returns.

If the land is vacant, will it be producing any income into the SMSF?

If so, how much income will the land produce? What is the yield (i.e. annual income divided by land value)?

Compare this yield to the bank interest you would earn if the amount was held in a risk-free bank account.

If the land is not going to produce income, then are you speculating on the land increasing in value?

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If so, what is your basis for this increasing in value. Is your source credible?

You will need to consider all the ongoing costs associated with the land, such as land rates or taxes.

Land costs will be in addition to costs in running the SMSF. Will the growth in the land value outweigh these costs?

There are also the initial costs you need to take into account, such as SMSF setup costs, land stamp duty, legal costs, etc.

How much does the land need to increase in value to recoup all of these costs and how long do you think this will take?

Is there a different investment, with lower costs, that could produce a similar net return sooner?

How will all of the initial and ongoing costs be covered, especially if the land does not produce an income?

If you do not have a lot of experience in purchasing land, or have a good understanding of property cycles, purchasing vacant land might not be a good idea.

Finally, think about what might happen if the land made up the majority balance of the SMSF and one member of the SMSF was to pass away.

How would the SMSF pay the death benefit equal to the deceased’s member balance out of the SMSF?
 

Can a SMSF Develop Property?

 
Generally, a SMSF is not permitted to develop on vacant land.
 

How Much Can My Super Fund Borrow to Buy Property?

 
Banks and lenders will usually lend up to 80% to purchase property within a SMSF.

However, the lender will also want to see that the SMSF can sustain the borrowing.

The lender will look at the existing balance and assets within the SMSF, as well as regularity of contributions and income produced from SMSF investments.

Obtaining borrowings for an investment that does not produce income is much more difficult than for an income-producing property.

Also, the vacant land would be unable to be developed on.

Under a limited recourse borrowing arrangement, the lender’s recourse will usually be limited to the property itself.

Therefore, you can understand a lender’s potential unwillingness to lend against vacant or rural land that they may have trouble recovering if they need to recoup the loan.

You should be aware that there are additional legal, accounting and lending costs in setting up a LRBA.

Some SMSF expenses are tax deductible and some are not. Click here for further information.

Chris Strano

Hi, I hope you enjoyed reading this article. If you want my team and I to help with your retirement planning, click here. If you prefer a DIY approach, then check out the SuperGuy HUB. Thanks for stopping by - Chris.

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6 Comments

  1. Jose

    Can I buy a memorial lot using my SMSF?

    Reply
    • Chris Strano

      Hi Jose, generally not, unless it is for investment purposes and satisfies the sole purpose test, SMSF investment strategy, SMSF trust deed, related party rules and arm’s length requirements.

      Reply
  2. David Shoff

    Great Information!! I also thinking of buying a property through my Superannuation account but I really didn’t know that we can’t buy vacant land through the Superannuation fund. Now, I have to open a Self Managed Superannuation Fund for buying a property. Can you please explain the requirements of opening an SMSF?

    Reply
    • Chris Strano

      Hi David,
      Careful consideration should be made prior to establishing a SMSF. SMSFs can be expensive, are more time consuming than retail or industry super funds and involve legal and administrative responsibilities.
      Generally, a SMSF should not be considered if you have less than $200,000 in super. However, personal circumstances will dictate the suitability of a SMSF. If you would like to discuss this option further, feel free to make a complimentary 15-minute appointment with our financial planning firm, Toro Wealth, by clicking this link.
      Regards,
      Chris

      Reply
  3. Nino

    So I have enough money in my SMSF to buy vacant land outright (no loan required).Can you confirm whether I can then build a house on that SMSF owned land with a package builder through progress payments either without a loan or a LRBA loan for build

    Reply
    • Chris Strano

      Hi Nino,
      A SMSF is able to develop on vacant land. However, a SMSF is unable to develop on vacant land with the use of a loan, as a LRBA can only be used to purchase a single acquirable asset – the development would cause the nature of the original single acquirable asset (vacant land) to change as it would no longer be vacant land. Also, you should be mindful of the rules around the development being undertaken by a related party. For example, there are limitations on what part of the development can and cannot be done by a related party of the SMSF and how the materials, labour, etc. are paid for. You also might consider the purpose of the development to ensure it is not considered to be running a business. Also, all SMSF assets need to be consistent with the SMSF investment strategy and permitted by the trust deed. Ultimately, development within a SMSF risks contravening many superannuation laws if not implemented correctly. Legal and taxation advice is strongly recommended prior to proceeding.

      Reply

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