Proven tips to buy vacant land with your SMSF

Your super fund can't borrow to buy residential vacant land anymore.

The rule changed in August when the Treasury Laws Amendment Act received Royal Assent, closing off new Limited Recourse Borrowing Arrangements for residential real property. That includes vacant residential land. If you exchanged a binding contract before 10 August, you're protected under transitional provisions. If you didn't, borrowing to acquire that residential block is no longer an option.

Can I still buy vacant land through my SMSF?

Yes, but only without borrowing, or if the land qualifies as business real property. Your SMSF can purchase vacant land outright using existing super balances, provided the acquisition meets the sole purpose test and isn't from a related party. The restriction applies to borrowing, not to ownership. If your fund has sufficient cash or liquid assets, you can still acquire residential vacant land and hold it as part of your retirement strategy. The same rules around related party transactions and sole purpose compliance apply as they always have.

Consider a member with a super balance approaching $400,000 who's been eyeing a residential block in Mornington Peninsula, an area known for its coastal lifestyle and steady long-term land value growth. Without borrowing, the fund could acquire a smaller parcel or wait until contributions and investment returns build the balance further. The trade-off is time and opportunity cost, but the asset is held without debt and all future capital growth accrues to the fund.

What counts as business real property?

Business real property means land and buildings used wholly and exclusively in one or more businesses. The business doesn't need to be yours, but the property must be actively used for business purposes at the time of acquisition and continuously thereafter. A vacant block marketed as commercial or zoned for future business use doesn't automatically qualify. The definition turns on actual use, not zoning or intention.

If you're looking at vacant land in areas like Red Hill or Main Ridge where mixed agricultural and lifestyle use is common, the primary production concession may apply. Under this concession, a dwelling occupying no more than 2 hectares won't disqualify the property, provided the main use of the whole parcel is primary production and not domestic or private. A vacant rural block intended for vineyard or farming operations may qualify, but only if that business use is established and maintained.

The challenge with vacant land and business use

Vacant land rarely satisfies the wholly and exclusively test because it isn't being used in a business at all. If you acquire a block intending to develop it later or lease it for agistment, that future or incidental use won't meet the definition at the time of purchase. The ATO's position in SMSFR 2009/1 is that the test applies at acquisition and must continue throughout the period of ownership. A block held vacant while you arrange finance, approvals, or tenants will likely fail.

In our experience, vacant land only works under an LRBA when it's already generating business income at settlement, such as a cleared lot leased to a neighbouring farm for grazing or cropping under a formal, arm's length lease. That's a narrow set of circumstances and requires the lease to be in place and enforceable before the fund borrows.

Can I develop the land after I buy it?

Not with borrowed funds. LRBA rules prohibit using borrowed money to improve an existing asset. If your SMSF acquires vacant land under an LRBA, you can't draw down further funds to construct a building, subdivide, or make capital improvements. Any development would need to be funded from the fund's other assets, and only after the original loan is repaid and the asset has transferred from the holding trust to the SMSF trustee.

That limitation makes vacant land a difficult fit for leveraged SMSF strategies. If the land isn't income-producing at acquisition and can't be improved using the loan, it sits idle while the fund services debt from rental income or contributions tied to other assets.

What about refinancing an existing SMSF land loan?

If your SMSF entered into an LRBA to acquire residential vacant land before 10 August, you can refinance that arrangement without triggering the new rules. The ATO considers refinancing an SMSF loan to mean entering into a new loan contract for the same asset, with the same or a new lender. Provided the refinanced loan relates to the same single acquirable asset and maintains the limited recourse character of the original arrangement, the post-commencement restriction doesn't apply.

A significant change to the terms or beneficiaries of the arrangement may end the existing LRBA and create a new one, which would then be subject to the restriction. Switching lenders or adjusting the interest rate structure alone won't do that, but adding a new property, changing the holding trust, or altering the ultimate beneficiaries could.

Buying land outright and the sole purpose test

If your fund buys vacant land without borrowing, compliance still hinges on the sole purpose test under section 62 of the SIS Act. Every SMSF investment must be maintained solely to provide retirement benefits to members. Acquiring a block in Mornington that you intend to build on and retire to later will contravene that test. The property can't be lived in by a member or a related party at any point while it's held in the fund, and the acquisition itself must be defensible as a genuine retirement investment, not a lifestyle decision dressed up in super.

The ATO scrutinises vacant land purchases closely because the line between investment and personal use can blur, particularly in areas like the Mornington Peninsula where members may have existing family or holiday ties. If the land is held for genuine capital growth and eventual sale within the fund, or for future income generation through a compliant lease, it can satisfy the test. If it's a block next door to your current home or on a street you've always wanted to live on, expect questions.

What if I already own vacant land in my SMSF?

Nothing changes. The restriction applies to LRBAs entered into on or after 10 August. If your fund already holds vacant residential land, whether purchased outright or under an LRBA established before that date, you can continue to hold it, refinance it, and eventually sell it under the usual rules. The legislation doesn't force divestment or retrospective compliance with the new restriction.

Capital gains on land held in an SMSF during accumulation phase are taxed at 15 percent, or 10 percent where the CGT discount applies after 12 months of ownership. Land supporting a retirement phase pension may be exempt from capital gains tax if the fund's assets are fully segregated, or partially exempt under the proportionate method. Division 296 tax may apply from 1 July for members whose total superannuation balance exceeds $3 million, but only on realised gains, not unrealised increases in land value.

Is there still a reason to use super for property?

For commercial property, yes. LRBAs for business real property remain unchanged, and the tax treatment inside super is still compelling for members accumulating wealth or drawing a pension. Concessional tax on rental income, potential CGT exemptions in pension phase, and the ability to leverage super balances into larger assets make commercial property a strong fit for many funds.

For residential vacant land, the case is weaker now that borrowing is off the table. Without leverage, you're committing a large portion of the fund's capital to a single, non-income-producing asset. That concentration of risk and lack of diversification may not suit every member, particularly those still in accumulation phase who benefit from compounding returns on liquid investments.

Call one of our team or book an appointment at a time that works for you. We work with licensed SMSF specialists and can help you understand whether your super fund is the right vehicle for the land purchase you're considering, or whether another structure makes more sense given the August changes.

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