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.
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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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.