Holding Costs: Why Purchasing Vacant Land with Your SMSF Is a Roadblock (And What to Buy Instead)

Talking to many clients, we’ve heard this question countless times: “I want to buy a block of vacant land with my Self-Managed Super Fund. Can I get a loan for it?”It’s an attractive idea. You picture acquiring a prime piece of earth, developing it, and watching its value skyrocket your retirement savings. It sounds like the perfect wealth-creation strategy for your Self-Managed Superannuation Fund (SMSF).But let us give you the expert, clear-cut answer: While acquiring land with cash is technically possible, gaining a loan for vacant land within your SMSF is virtually impossible.This isn’t an arbitrary decision by lenders; it comes down to a crucial combination of strict lending criteria and complex rules surrounding holding costs and income generation. Let’s break down this matter and show you the proven path forward.

Property Holding Costs & How They Become a Hurdle

Any property investment, whether inside or outside your SMSF, comes with a running tab known as property holding costs. These are the unavoidable expenses you incur just to maintain ownership. For an SMSF property, these costs typically include:

• Council rates and water charges.

• Land tax.

• Insurance.

• Interest on the loan (if leveraged).

• Repairs and maintenance.
  

When you purchase an income-producing asset (like a house with tenants), these costs are generally tax-deductible against the rental income inside your super fund, which is a major benefit of using an SMSF.

The Problem with Vacant Land Holding Costs

The moment you switch that focus to vacant land, the situation changes drastically, primarily due to recent ATO rules designed to prevent private land banking, where deductions are claimed without any income. The issue with vacant land holding costs is simple:

No Deductions:

• If the land is genuinely vacant and not genuinely ready to produce assessable income, your SMSF generally cannot claim deductions for expenses like council rates, insurance, or vacant land tax. This makes the investment structurally inefficient.
  

The Cash Drain:

• Your SMSF incurs non-deductible expenses that act as a pure cash drain on the fund’s liquidity, violating the core principle of a retirement fund: growing capital efficiently.
  

Why SMSF Lending for Vacant Land Is Off the Table

Now, let’s connect holding costs to the lending process. To borrow funds for a property purchase inside an SMSF, you must use a Limited Recourse Borrowing Arrangement (LRBA). Lenders have three non-negotiable requirements that vacant land fails to meet:

Security:

• Lenders require iron-clad security. They prefer an already built property that is immediately income-producing (e.g., residential with tenants or commercial with a lease). Vacant land, especially if intended for future construction, carries a high risk and no immediate income stream to service the loan.
  

The “Single Acquirable Asset” Rule:

• The rules for LRBAs are exceptionally strict. Lenders cannot facilitate a construction loan within an LRBA structure for a brand-new dwelling. An LRBA is meant to acquire an existing, defined, single asset. Once you introduce construction, you fundamentally change the nature of that asset, which is a major red flag for both the lender and the ATO.
  

The Cash Flow Gap:

• Since the vacant land holding costs are non-deductible and there is zero rental income, the lender has no way to assess the serviceability of the loan from the asset itself. They require a clear line of sight to rental income to approve an LRBA.
  

The Best Options: Your Path to SMSF Property Wealth

The good news is that understanding these limitations instantly clarifies the most powerful and effective property investment strategies for your SMSF. Instead of navigating the impossible hurdle of vacant land, our team at SMSF Loan Experts

specialises in facilitating LRBAs for assets that are proven to build wealth and comply with all ATO and lending requirements. Here’s where your SMSF can truly shine and secure lending:

1. Residential Investment Property (Already Built)

When you use your SMSF to purchase an existing house, townhouse, or apartment, you are acquiring a defined, single asset that immediately produces rental income.

Benefit:

• The rental income is used to service the loan, and all your associated holding costs (interest, rates, maintenance) are generally tax-deductible. It is a clean, compliant, and widely accepted LRBA strategy.

  
  

2. Commercial Investment Property (The Power Play)

For many SMSF investors, commercial property (offices, warehouses, retail spaces) offers the best-case scenario for long-term retirement wealth.

Benefit:

• Commercial leases are often longer (e.g., three to five years versus one year), and tenants typically cover outgoings, significantly reducing your fund’s direct property holding costs. The higher potential rental yields can accelerate debt repayment and capital growth, making it a highly attractive option for an LRBA.

  
  

The Expert Takeaway

While buying vacant land is appealing, the regulations surrounding vacant land holding costs and the inability to secure an LRBA make it a non-starter for leveraged SMSF investing.

Our mission at SMSF Loan Experts is to help you move past roadblocks and onto the most financially rewarding path. Forget the complexity of empty blocks and focus on acquiring established residential or commercial property that generates immediate income and qualifies for an easy-to-understand LRBA.

Ready to leverage your SMSF to buy a wealth-building asset? Talk to one of our SMSF lending specialists today—we know the lenders who specialise in this field and can quickly assess your fund’s borrowing power.