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