Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 117

SMSFs and house and land packages

Property investment is gradually becoming more popular with SMSF investors, and I am often asked whether SMSFs can purchase house and land packages. Not only would the SMSF hopefully achieve some long term capital gain, it would also be entitled to claim some depreciation on the new asset as it ages. I always clarify first whether my clients want to purchase a house and land package or purchase a vacant block of land and then build a house on it. What is the difference? It can make a huge difference in the SMSF world, especially when there are borrowings involved.

Purchase as a single acquirable asset

An SMSF can borrow money to purchase a house and land package as long as it is purchased together in the one transaction as a single acquirable asset where the asset is identified up front as vacant land with a completed house on it.

But if an SMSF purchased a block of land with borrowings and then later built a house on the land, this would not be allowed under the limited recourse borrowing arrangement (LRBA). The superannuation law does not allow the single acquirable asset, in this case the block of land, to be improved (by building a house on it) while the loan remains outstanding. There is a very good reason for this.

The borrowing rule is referred to as a limited recourse borrowing arrangement. It means the lender’s rights, on any default on the borrowing by the SMSF, are limited to the single asset acquired under the arrangement. This means, the lender does not have any claim over any of the SMSF’s other assets. The borrowing is quarantined to the single acquirable asset. The law is designed to protect the remaining assets within the SMSF in the event of its default.

So, if an SMSF borrows to purchase a block of land and later builds a house on the land, and then due to some unfortunate financial circumstances cannot repay the loan, the lender will take possession of the asset – which is now a property consisting of a house and land. The money that the SMSF spent building the house on the vacant land is lost as it cannot be recovered from the lender. To make matters worse, the SMSF has also contravened the LRBA and would be in trouble with the Tax Office.

Make sure the SMSF complies

The trustees of the SMSF must ensure that:

  • they identify up front that the single acquirable asset is the land with a completed house on it
  • the lender’s security on the borrowing is at all times over the land and the completed house
  • the LRBA with the lender allows for multiple draw-downs for the deposit, progress payments and the final payment at settlement.

House and land packages can offer investment opportunities for SMSFs, but if they don’t comply with the law, the investment could end up being a costly mistake.

 

Monica Rule is an SMSF Specialist Adviser and the author of ‘SMSFs and Properties’. See www.monicarule.com.au. This article is for general education purposes only and does not consider the personal circumstances of any investor.

 

RELATED ARTICLES

Heed my problems borrowing in my SMSF

Oh dear, not another glitch with borrowing in SMSFs

Watch SMSF borrowing rules for separate assets

banner

Most viewed in recent weeks

16 ASX stocks to buy and hold forever, updated

This time last year, I highlighted 16 ASX stocks that investors could own indefinitely. One year on, I look at whether there should be any changes to the list of stocks as well as which companies are worth buying now. 

2025-26 super thresholds – key changes and implications

The ABS recently released figures which are used to determine key superannuation rates and thresholds that will apply from 1 July 2025. This outlines the rates and thresholds that are changing and those that aren’t.  

Is Gen X ready for retirement?

With the arrival of the new year, the first members of ‘Generation X’ turned 60, marking the start of the MTV generation’s collective journey towards retirement. Are Gen Xers and our retirement system ready for the transition?

Why the $5.4 trillion wealth transfer is a generational tragedy

The intergenerational wealth transfer, largely driven by a housing boom, exacerbates economic inequality, stifles productivity, and impedes social mobility. Solutions lie in addressing the housing problem, not taxing wealth.

What Warren Buffett isn’t saying speaks volumes

Warren Buffett's annual shareholder letter has been fixture for avid investors for decades. In his latest letter, Buffett is reticent on many key topics, but his actions rather than words are sending clear signals to investors.

The 2025 Australian Federal election – implications for investors

With an election due by 17 May, we are effectively in campaign mode with the Government announcing numerous spending promises since January and the Coalition often matching them. Here's what the election means for investors.

Latest Updates

World's largest asset manager wants to revolutionise your portfolio

Larry Fink is one of the smartest people in the finance industry. In his latest shareholder letter, the Blackrock CEO outlines his quest to become the biggest player in private assets and upend investor portfolios.

Economy

Australia's economic report card heading into the polls

Our economy grew by a nominal rate of 7% per annum from 2017 to 2024, but it benefited from the largesse of fiscal and monetary policies, both of which are now fading. We need a new, credible economic growth agenda.

Preference votes matter

If the recent polls are anything to go by, we are headed for a hung parliament at the upcoming federal election. So more than ever, Australians need to give serious consideration to their preference votes.

SMSF strategies

Meg on SMSFs: Tips for the last member standing

It’s common for people as they age to seek more help in running their SMSF if their capacity declines. An alternate director may be a great solution for someone just planning for short-term help in the meantime.

Wilson Asset Management on markets and its new income fund

In this interview, Matthew Haupt from Wilson Asset Management discusses his outloook for the ASX, sectors such as REITs that he likes, and his firm's launch of a new income-oriented listed investment company.  

Planning

‘Life expectancy’ – and why I don’t like the expression

Life expectancy isn't just a number - it's a concept that changes with survival rates over time. This article breaks down how age, survival, and societal factors shape our understanding of life expectancy, especially post-Covid. 

The shine is back on gold, and gold miners

Gold mining stocks outperformed in 2024 and are expected to do well in 2025. At this point in the rally, it's worth considering what has driven gold prices higher and why miners could still have some catching up to do.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.