Property Development

SMSFs can invest in properties, but the overriding principle is that a Fund cannot have loans if property developments are undertaken.

 

Investing in land or subdivisions

An SMSF can invest in property with or without loans, provided the Investment Strategy allows for it. When a Fund is using a loan to purchase an investment property, it’s a legal requirement to set up a Limited Recourse Borrowing Arrangement (LRBA) to facilitate lending. 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 – and therefore the LRBA – is in place.

Generally, property development is not permitted if a Fund has an LRBA in place. See the table below for some examples of property developments that are prohibited under the Tax Office rules while there are loans in the SMSF:

Type of Property Prohibition
Vacant block of land on a single title The land is subdivided into multiple titles
Vacant block of land on a single title Building a residential house on the land
Land with a house on it Changing the nature of the property, e.g. changing from a 3 bedroom to a 4 bedroom property

However, a Fund can purchase an off the plan property with settlement on the completion of the property.

If an SMSF intends to develop a property it owns or perform a subdivision, the Fund cannot do so while an LRBA is in place. If the Fund intends to develop the land or perform a subdivision on land currently in a LRBA, the loan needs to be settled before any development can take place or alteration in the nature of the property can be made.

Q: Can an SMSF invest in a property with a related party
Q: Can an SMSF undertake a property development in a S13.22C unit trust arrangement with a related party
Q: Can an SMSF undertake property developments as a tenant in common when investing with a related party
Q: Can an SMSF borrow to repair and maintain an existing property it already owns

 

If an SMSF wants to use loans in purchasing a property, Trustees need to remember to set up a Bare Trust structure.

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Superannuation Warehouse is an accounting firm and do not provide financial advice. All information provided has been prepared without taking into account any of the Trustees’ objectives, financial situation or needs. Because of that, Trustees are advised to consider their own circumstances before engaging our services.