Since 2007, a Self-Managed Super Fund (SMSF) has been allowed to borrow money to acquire an asset through a Limited Recourse Borrowing Agreement (“LRBA”). These borrowing arrangements have often been used to borrow to acquire property through your SMSF. This includes land with the intention of developing it.
There are many advantages in relation to using a superannuation fund as the vehicle for property development including:
• 15% flat tax rate on development profits
• An effective tax rate of 10% on capital gains for assets held for more than 12 months
• A zero rate of tax on profits and capital gains when all members of the fund are in pension mode.
There are also some potential disadvantages:
• While the fund can borrow to purchase the land to be developed, it cannot borrow against property already held by the fund and cannot borrow extra funds to develop or improve the land.
• You cannot invest in an asset where there is a mortgage or another charge held over it.
• Need to ensure the complex ‘in-house asset’ rules and sole purpose test are complied with.
There are costs associated with setting up a LRBA, however generally the tax advantages will outweigh these costs.
The acquisition, holding and development of development land by a SMSF involves both regulatory and commercial issues. It is vital that SMSF Trustees ensure that the acquisition and use of development land does not cause the SMSF to breach the relevant legislative provisions and that any development agreement is carefully drafted.
Ivan Filipovic is a Director of Redwood Advisory – SMSF Specialists, who specialise in property investment in SMSF. Ivan can be contacted on 1300 790 110 or 0425 622 226.
Developing Land within a Self Managed Super Fund
