Proven tips to use SMSF loans for vacant land purchase

Vacant land is not residential property for the purposes of SMSF loans under the new rules that commenced in August 2026. The restriction on new residential Limited Recourse Borrowing Arrangements applies only to property with a dwelling that can be occupied. Vacant land sits in a distinct category, and whether your fund can borrow to purchase it depends on whether that land qualifies as business real property.

Can an SMSF Borrow to Buy Vacant Land in Aveley?

An SMSF can borrow to acquire vacant land through a Limited Recourse Borrowing Arrangement if the land qualifies as business real property under section 66 of the Superannuation Industry (Supervision) Act 1993. Business real property means land used wholly and exclusively in one or more businesses. The business does not need to be operated by the SMSF itself. Vacant land leased to a third party for commercial purposes such as storage, equipment yards, or machinery parking may qualify. Vacant land held for future development or capital appreciation without a current business use does not meet the definition.

Consider a member who identifies a 2,000-square-metre vacant block in the Aveley industrial precinct. The member's SMSF purchases the land under an LRBA and leases it immediately to a local transport operator for truck and trailer storage. The lease is on arm's length terms at market rent. The land is used wholly and exclusively in the transport business, so it qualifies as business real property. The arrangement complies with the SIS Act.

In a different scenario, the same member purchases a residential-zoned vacant block in Aveley with the intention of holding it until retirement, at which point the member plans to build a home. The land generates no income and has no business use. It does not qualify as business real property, and an LRBA cannot be used to acquire it under the rules that commenced on 10 August 2026.

What Changed for Residential LRBAs in August 2026

From 10 August 2026, an SMSF can only borrow under an LRBA to acquire real property that is business real property. This restriction applies to any LRBA entered into on or after that date. Residential property with a dwelling cannot be purchased using borrowed funds unless a binding contract was exchanged before 10 August 2026. Vacant land intended for residential development or personal use falls outside the business real property definition and cannot be acquired under an LRBA unless it has a current business use that satisfies the wholly and exclusively test. LRBAs for commercial property or business real property are not affected by the change.

How the Business Real Property Test Applies to Vacant Land

Whether vacant land qualifies as business real property is determined by its actual use at the time of acquisition. Marketing material, zoning, or future intentions are not relevant. The land must be used wholly and exclusively in one or more businesses. A property marketed as commercial but left idle does not satisfy the test. The business in which the land is used does not need to be carried on by the SMSF, so leasing the land to a third party for their business purposes is acceptable.

Vacant land in Aveley's rural and industrial zones may be suitable if leased for business purposes such as contractor storage, equipment parking, or agricultural use. Vacant land in residential zones is unlikely to qualify unless it has a current commercial use that can be sustained throughout the period of the LRBA. The ATO's guidance in Superannuation Funds Ruling SMSFR 2009/1 provides detailed examples, and trustees should seek advice from a licensed SMSF specialist before proceeding.

Deposit Requirements and Loan LVR for Vacant Land

Lenders offering SMSF commercial loans for vacant land typically require a higher deposit than for improved property. Loan LVR ratios for vacant land under an LRBA commonly range from 50 to 65 percent, meaning the SMSF must provide a deposit of 35 to 50 percent of the purchase price. This reflects the higher risk lenders associate with land that generates no rental income until it is improved or leased. The loan interest rate for vacant land may also be higher than for income-producing commercial property, and lenders may require evidence of the SMSF's capacity to service the loan without relying on rental income from the land itself.

The SMSF must meet the purchase price, stamp duty, legal costs, and loan establishment fees from existing fund assets or member contributions. Borrowed funds under the LRBA can be used to acquire the land and pay directly related costs such as stamp duty, but cannot be used to improve the land or construct buildings. Any capital improvement must be funded separately from contributions or fund income.

Limited Recourse Borrowing Arrangement Structure for Vacant Land

The vacant land must be held in a separate holding trust, often referred to as a bare trust. The SMSF acquires a beneficial interest in the land and obtains legal ownership once the loan is repaid. The holding trust cannot be a discretionary trust or a unit trust with multiple unit holders. The SMSF trustee must have the right to acquire legal ownership after making one or more payments. The asset cannot be subject to any charge other than under the LRBA itself.

If the SMSF defaults on the loan, the lender's recourse is limited to the asset held in the trust. The lender cannot pursue other SMSF assets or the personal assets of the trustees unless a personal guarantee has been given outside the LRBA structure. A related party may provide a personal guarantee, but their recourse must also be limited to the asset under the arrangement.

Rental Income and Tax Treatment for Vacant Land in Accumulation Phase

If the vacant land is leased to a third party for business use, the rental income is assessable to the SMSF at a rate of 15 percent in accumulation phase. Deductible expenses include loan interest, land rates, insurance, and management fees. Vacant land that is not leased generates no income and the SMSF must service the loan from other fund income or member contributions. Borrowing to hold non-income-producing land places strain on the fund's cash flow and may affect borrowing capacity for future opportunities.

Where the land is eventually sold, a capital gain is calculated based on the difference between the sale price and the cost base, which includes the purchase price, stamp duty, legal costs, and any capital improvements funded by the SMSF. If the land has been held for at least 12 months, a one-third CGT discount may apply, producing a maximum effective rate of 10 percent on the discounted gain. The actual tax outcome depends on the fund's overall tax position, including any capital losses carried forward.

Can Members Develop or Use Vacant Land Held in an SMSF?

Members and related parties cannot occupy, use, or derive any present-day benefit from vacant land held in an SMSF. The sole purpose test under section 62 of the SIS Act requires the fund to be maintained solely to provide retirement benefits. A member who camps on the land, stores personal equipment, or uses it for recreational purposes would contravene this requirement. The land must be held strictly for investment purposes or leased on arm's length terms to an unrelated third party.

Development of the land using borrowed funds is not permitted under an LRBA. Borrowed funds can only be used to acquire the single asset, not to improve it. If the SMSF wishes to develop the land, the development must be funded from contributions or fund income after the land is legally transferred to the SMSF. This limitation reduces the attractiveness of vacant land as an SMSF investment unless the land can generate income in its current state or the fund has sufficient liquidity to service the loan without rental income.

Refinancing an LRBA for Vacant Land

An SMSF that acquired vacant land under an LRBA before 10 August 2026 can refinance the loan without triggering the new residential property restrictions. The ATO considers refinancing to mean entering into a new loan contract for the same asset with the same or a new lender. The refinanced loan must relate to the same single asset, maintain the limited recourse character of the original arrangement, and meet arm's length terms.

Where the vacant land qualifies as business real property, refinancing is permitted regardless of when the original LRBA was entered into. The loan interest rate must fall within the ATO's safe harbour interest rates published under Practical Compliance Guideline PCG 2016/5, or the SMSF must be able to demonstrate that the rate is consistent with arm's length terms. Income from an arrangement that does not meet arm's length terms may be assessed as non-arm's length income and taxed at 45 percent.

Division 296 Tax and Vacant Land Holdings

From 1 July 2026, members with a total superannuation balance exceeding $3 million at the end of the financial year are subject to an additional 15 percent Division 296 tax on the proportion of earnings attributable to the amount above that threshold. Members exceeding $10 million are subject to an additional 10 percent tax on the proportion above that higher threshold. For SMSF purposes, Division 296 fund earnings include rental income and realised capital gains. An unrealised increase in the value of vacant land does not produce assessable income and does not by itself contribute to the Division 296 calculation.

Vacant land held in an SMSF does not produce rental income unless leased. A member holding vacant land in accumulation phase with no rental income would only be exposed to Division 296 tax when the land is sold and a capital gain is realised. The SMSF may elect to adjust the cost base of the land to its market value as at 30 June 2026 for Division 296 purposes. This election recognises accrued value prior to the commencement of Division 296 tax and applies to all CGT assets held directly by the SMSF at that date. The election cannot be revoked and must be made by the due date of the SMSF annual return.

Solve It Finance works with SMSF mortgage brokers and licensed SMSF specialists to structure arrangements that comply with the SIS Act and ATO guidance. Call one of our team or book an appointment at a time that works for you.

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