If an SMSF is looking to invest in land, it needs to be aware of the rules and regulations imposed by the Tax Office. The structure required to invest in land is similar to that in a conventional property. For more information on property investment, please see here.

Investing in land or subdivisions with loans

An SMSF can invest in property with or without loans, provided the Investment Strategy allows for it. When a Fund using a loan to purchase an investment property, it is a legal requirement to set up a Limited Recourse Borrowing Arrangement (LRBA) to facilitate the loan in the SMSF. The investment property will be described in detail in the Deed of this LRBA. It’s important to note that the nature of the property is not allowed to change while the loan is in place.

Generally, property development is not permitted if a Fund is taking out an LRBA. See the table below for some examples of property developments that are prohibited under the Tax Office rules:

Type of PropertyProperty development undertaken
Vacant block of land on a single titleThe land is subdivided into multiple titles
Vacant block of land on a single titleBuilding a residential house on the land
Land with a house on itTurning the asset to a duplex by building an additional house on the land

If an SMSF would like to develop their land or subdivision, the Tax Office rules generally only allow the development to happen after the LRBA has been settled by the Fund.

ATO Guidance on Property Development

Recently the Tax Office has released a new Bulletin related to the Property Development into an SMSF. See link below for the entire SMSF Regulator’s Bulletin:

Transferring ownership of land

The rules and regulations surrounding the transferring of ownership of land are similar to that of conventional property. If the land is deemed to be residential in nature, Trustees are not allowed to purchase the land from themselves or a related party. However, if the land is deemed to be commercial in nature, Trustees can purchase it from themselves, on the basis that the transaction takes place on arm’s length basis.

Commercial or residential

The question then becomes: is the land commercial or residential in nature?

If the subdivision is surrounded by lands that are commercial in nature, the subdivision is most likely to be classified as a commercial property. Similarly, if the subdivision is surrounded by lands that are considered to be residential properties, it would most likely to be considered residential in nature. Trustees should be aware of the nature of the land or subdivision before making any investment decisions. For more information on the rules and regulations of investing in properties, please see here.

Property Restoration and Improvement

Property restoration means bringing the property back to its original state and function. This includes maintenance and repairs. The SMSF can always pay for the expense. SMSF can also use the borrowed money from existing LRBA to fund for work.

Property improvement means enhance the quality of the asset to the extent that it does not make the asset becoming another asset. Property improvement is allowed when there is LRBA for the property but the expenses must be funded by SMSFs’ own resources such as cash in the bank account or Members’ contributions. Borrowed fund must not be used for this purpose. 

The ATO provides some guidance under SMSFR 2012/1.

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