Investment - SMSF

Can I borrow funds through my SMSF (Self Managed Superann... A Self Managed Superannuation Fund can borrow money to purchase an investment property. However, certain restrictions...
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Investment - SMSF

The following advice is of a general nature only and intended as a broad guide. The advice should not be regarded as legal, financial or real estate advice. You should make your own inquiries and obtain independent professional advice tailored to your specific circumstances before making any legal, financial or real estate decisions. Click here for full Terms of Use.

Can I borrow funds through my SMSF (Self Managed Superannuation Fund) to buy a holiday home?

A Self Managed Superannuation Fund can borrow money to purchase an investment property. However, certain restrictions apply:
  • Borrowing is generally restricted to 80% of the value of the property to be purchased
  • The fund must have a balance sufficient to cover the 20% deposit and associated purchasing costs
  • All loan repayments must be paid by the fund.  If the rental income is not sufficient to cover the mortgage repayments, additional contributions to the fund will be required through the fund.
  • Speak to your financial advisor and taxation accountant prior to entering into any property transaction. More details can also be found in the ‘Looking to invest?’ part of our website. 

Are there any benefits to investing in a holiday property through a ‘Self Managed Superannuation Fund’?

There are a number of advantages to investing in property through your SMSF, however, there are restrictions in place and due diligence must be taken to ensure your fund does not breach the Superannuation Investment Scheme Act.  
  • Your SMSF can invest in both residential and commercial property
  • The maximum rate of tax your SMSF will pay on rental income is 15% (as at June 2013)
  • Once your SMSF is in the pension phase, the taxation rate on income drops to 0% (as at June 2013) whereas personally held property rental income is taxed at the marginal rate which is currently as high as 46.5%
  • If your SMSF holds a property for more than 12 months, any capital gain made on the sale of the property will be taxed at a maximum of 10% or again at 0% if the SMSF is in the pension phase (as at June 2013)
  • Your SMSF can borrow limited funds for repairs and maintenance however it is not permitted to borrow funds to improve the existing asset

Can I live in the holiday home that I wish to buy through my Self Managed Superannuation Fund?

To ensure your SMSF does not breach the SIS Act, you and your family cannot receive any benefit from an investment property owned by your SMSF. This includes personal use of the property at anytime.  All assets must be held for the sole purpose of providing retirement benefits to the fund members.
The SMSF can however purchase a property to be rented out to others as a holiday home.  If you or your family decide to stay in the property for any period of time, it will no longer meet the sole purpose test, and the Australian Taxation Office may classify the total asset as in-house. 
If the value of the holiday house is greater than 5% of the total assets in the SMSF, and is also considered by the ATO as an in-house asset, the SMSF will lose the concessional tax treatment of 15% and be taxed at the marginal tax rate of up to 46.5% (as at June 2013).
As there are serious penalties for getting your property investment strategy wrong within a SMSF, you should seek advice from your financial adviser or accountant.

Are there any hidden costs associated with buying a holiday home with a SMSF?

People often underestimate their expenses and outgoings when buying an investment property.  These costs can include:
  • Owners Corporation/Strata levy costs
  • Letting and management fees
  • Property and landlord insurance
  • Caretaker and cleaning costs
  • Electricity, land tax, water and council rates
  • Potential investors need to consider that their holiday homes could sit vacant for weeks on end and therefore should have funds in reserve to maintain their mortgage repayments.   
Consistent advertising, regular property maintenance, furniture replacement and linen hire are other expenses to consider.

Owners also have to balance the high-cost demands of guests who seek the luxury of finer furnishings, pay TV, modern kitchens, air conditioning, multiple bathrooms, barbeques, DVD players and games facilities.

Is a holiday home a good choice for Self Managed Super Fund investment?

Choosing between a conventional investment property and a holiday home investment can be tough. You really need to decide whether you’re able to maximise occupancy, year-round.  

Here are some useful questions and tips to help weigh your options:
  • Will the property be rented to holiday makers most of the time and will the income generated exceed that of conventional long-term leasing?
  • Are you prepared to cover a large portion of the running costs out of your own funds?
  • What is your long or short-term financial goal for the property?
  • Will the property offer you sufficient tax benefits?
  • re you confident of your financial position if there is a downturn in the holiday rental or sales market?

  • Try and take the emotions out of your decision making
  • Remember, property (other than your main residence) attracts capital gains tax when selling or transferring the title to someone else

If you are a first time investor who requires consistent rental income to cover mortgage repayments, it may be safer considering a long-term residential property in a capital city or a highly populated area, rather than a holiday home investment property for your SMSF.

What should I look for when buying a holiday home for SMSF investment?

The most important rule when buying any property is location, location, location.  

This means the property and local area must offer appeal in order to provide good rental returns and potential capital growth in the future. Things to consider include:  
  • Infrastructure and amenities
  • Future plans of local municipalities for the area
  • Local appeal to tourists - all year round or seasonal
  • Accessibility from major towns to the property, proximity to capital cities and/or airports
  • Street appeal and attractiveness of the property
  • Natural light, quiet enjoyment and a good amount of accommodation space
  • Appeal to a broad range of tenants i.e. couples, singles and families
Should the sales market soften, freestanding property tends to drop less in price than units and even less than privately owned hotel rooms.  

Can I rent out my SMSF holiday home myself or should I use an agent?

When deciding on whether to manage your holiday rental property yourself, your decision should be based on your knowledge of the industry and your available free time, the ability to handle maintenance issues at the property, your customers’ expectations, possible complaints and your willingness to be directly involved.

If you wish to manage the letting of your property yourself be aware that that there is a good level of involvement required to complete an inventory and condition report at the beginning and end of the rental period, cleaning of the property after the tenants have left, laundering of all linen, immediately replacing any broken appliances and dropping off the keys to the new tenants.

Self managing owners need to be highly organised to handle all of the tasks required and have all advertising and booking mechanisms streamlined to maximise their effectiveness.

How should I choose a real estate agent to lease my SMSF holiday home?

An experienced, professional management team makes all the difference between an empty or occupied holiday home.  

When choosing an agent or property manager, look for a strong track record of experience in holiday letting as well as extensive knowledge of the competitive holiday letting market.  
If you choose to deal through an agent you must complete a written agency agreement that sets out what the agent will do for you, and agree to instructions on matters such as:
  • Asking rent and security deposits
  • Cancellation and return of deposits
  • How to handle minor repairs or damage to the premises
  • Agent fee’s and commissions
  • Other services such as cleaning and laundering of furniture and linen
  • Instructions on how to handle disputes
  • Conduct of holiday makers and respectful treatment of permanent neighbours

As a landlord of a holiday home, what services should I be supplying?

When supplying accommodation, landlords should specify (in writing) to the occupants the services and facilities that are included in the rental price. For example:
  • All utility costs
  • Cleaning services
  • Gardening
  • Pay TV
  • Laundry services

Landlords also need to understand that, depending on the price range, guests may be seeking a high-end, luxury standard of both property and interiors. This could include:  
  • Modern kitchens and bathrooms
  • Quality furniture and soft furnishings
  • Luxury Manchester
  • Contemporary appliances (including modern pay TV’s, DVD players, and computer games)
  • Adequate air conditioning and heating
  • Barbeques

What is the best way to ensure a tenant does not damage your property?

You (or your agent) and the occupant should inspect of the property before the occupant moves in, to check the state of the property.  

It is suggested that a Condition Report and Inventory Report be completed at the beginning and end of each tenancy.

The Condition Report should report on the property itself (inside and out) including any existing damage, marks, wear and tear. The inventory Report should note all furniture, soft furnishing, cutlery, crockery, Manchester and appliances provided, noting the state of their condition.  

The more time taken to carefully complete these reports the better the outcome for both parties at the end of the tenancy (you may even wish to take photographs to prove the condition of certain items).

Both the occupant and landlord should then sign both reports stating their agreement to condition. This is the best way of avoiding disputes when the occupant moves out.

Should the occupant damage any part of the property including inventory items, the occupant will be responsible for such damage with the exception of fair wear and tear of items or property.
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