The allure of property investment, coupled with the appealing 15% tax rate during the SMSF accumulation phase and the potential for tax-free retirement, greatly motivates many SMSF trustees to consider property development for substantial returns. This article delves into the advantages, challenges, and common issues associated with this investment approach.

An SMSF can invest in property development, provided trustees strictly adhere to the rules, especially the ‘sole purpose test’, to maintain the fund for retirement, ill-health, or death benefits. Breaching this principle carries severe consequences, including loss of tax advantages and potential legal penalties.
Given the high-risk nature of property development, it’s crucial for trustees, particularly when dealing with related parties, to avoid treating the SMSF as merely a funding source. SMSFs can invest in property development through various means, including:
- Direct development
- Ungeared trusts or companies
- Investments in unrelated entities
- Joint ventures
Direct Development From Fund Assets
An SMSF can purchase land from an unrelated party and develop the property in its own right. Common issues that often arise include:
Land Acquisition Restrictions
SMSFs face restrictions in purchasing land from related parties, unless it’s business real property used exclusively for business. This means that land inherited by a member or owned by a family trust, even if ideal for development, cannot be purchased by the SMSF.
Borrowing Limitations for Property Development
SMSFs are permitted to borrow for land purchase under limited recourse borrowing arrangements, but they can’t use loans for property development. Any development must wait until after the loan for land purchase is fully repaid.
Choosing the Developer
Engaging related party developers is fraught with challenges. All work and materials must be acquired at market value, prohibiting any ‘mates rates’ benefits. It’s crucial to ensure all transactions and interactions are well documented and transparent.
GST Considerations in SMSF Property Development
Goods and Services Tax (GST) may be applicable to property development and sales. If an SMSF is deemed to be in the business of property development or undertaking a commercial development, GST obligations could arise.

If your SMSF is not undertaking a property development project in its own right, there are a few ways for an SMSF to invest in property development projects:
Investing Through Related Ungeared Trust or Company
SMSFs can invest in property development through an ungeared trust or company under specific conditions outlined in SIS Regulation, section 13.22C. This arrangement is suitable for related parties investing together, provided there is no leasing to related parties (unless it’s business real property), no borrowings, and all transactions are conducted at arm’s length. The trust or company must not be conducting a business and should meet several other criteria to ensure compliance. Failure to meet these requirements could reclassify the investment as an in-house asset, necessitating significant adjustments.
Considerations and Potential Challenges
Investing in property development through unrelated entities allows for greater flexibility in investment amounts and borrowing capabilities. However, it’s essential for the SMSF and related parties not to exceed a 50% ownership in these entities to avoid reclassification as related entities. Careful consideration and adherence to regulations are crucial, especially in joint venture arrangements, to ensure compliance and successful property development investment through an SMSF.
Joint Venture Arrangements in SMSF Property Investment
SMSFs can engage in joint venture (JV) property developments, though this comes with strict criteria and several considerations. It’s crucial to establish the true nature of the JV, particularly when involving related parties, to ensure it aligns with ATO guidelines. In a JV, the SMSF invests directly in the property, not the entity managing the development, sharing both costs and returns proportionately. Structuring is key; incorrect arrangements could lead to the investment being classified as an in-house asset. Tax, GST, legal implications, and the overall suitability of an SMSF for such ventures must be carefully evaluated, ideally with professional advice from a licensed financial adviser, lawyer, and accountant.
Ready to Explore SMSF Property Development?
Thinking about property development through your SMSF? Connect with Solomons Accountants & Advisers for expert advice tailored to your goals.