Running a B n b using Your SMSF
Many ask if it is possible running a B n B using your SMSF? The allure of a coastal property. The sound of waves crashing, stunning sunsets, and the potential for lucrative rental income and capital growth. These are all good reasons to invest in coastal real estate.
If you have a Self-Managed Super Fund (SMSF), you might wonder whether such an investment could fit within your retirement strategy. The short answer is yes, but with a few critical hurdles to navigate.
The Vision vs. The Rules
Picture this: a charming beach house listed as an Air BnB, earning a steady income from city folk seeking seaside serenity. It’s a solid investment, possibly held by you or a family trust. When your SMSF is the buyer, there are strict rules to follow to make sure it does not get on the wrong side of the SIS Act and ATO. At the heart of these rules lies the Sole Purpose Test. This Test is a guiding principle that requires all SMSF investments to exist solely to provide retirement benefits to fund members. This means no personal holidays or family getaways at the property, even for a weekend. The property must remain a pure investment vehicle.
Passive Income or a Business?
Runing your smsf as a a BnB often walks a fine line between passive investment and running a business. While it’s perfectly fine for your SMSF to own income-generating assets, running an active business inside an SMSF raises red flags with the Australian Taxation Office (ATO).
For the Fund to remain compliant, the property should be managed passively, perhaps through a third-party property manager or a platform like Airbnb. Any hint of active business operations could lead to scrutiny and potential penalties.
Renting to Others—Not Yourself
Another non-negotiable rule is the arm’s-length principle. The property can only be rented to unrelated parties at market rates. You may not rent to yourself, your family, or other related parties, which is strictly prohibited, even if you pay fair market value. This ensures no personal benefit is derived from an SMSF-owned property, keeping your Fund’s compliance intact.
Financing the Dream
If your SMSF doesn’t have the cash reserves to purchase the property outright, borrowing may be an option. However, SMSF borrowing rules are strict. Therefore, any loan must comply with Limited Recourse Borrowing Arrangements (LRBAs), and the property must be a single acquirable asset. Also, note improvements or renovations cannot be funded using borrowed money, so make sure the property is rental-ready from the outset.
Tax Perks and Responsibilities
Income generated from the property, including air BnB bookings, will be taxed at the SMSF’s concessional rate of 15% if your Fund is in the accumulation phase. In the pension phase, the rental income could even be tax-free. Capital gains tax on the property also benefits from these lower rates, making SMSFs an attractive structure for property investments, and often, many wait till retirement to sell or transfer the property.
Location, Location—and Local Laws
Coastal properties are often subject to local council regulations and zoning laws, mainly when used as short-term rentals.
Before purchasing, ensure your dream property complies with all relevant laws and licensing requirements. This will save your SMSF from unexpected hurdles down the line.
Is It Right for Your SMSF?
While owning a coastal BnB through your SMSF can be a rewarding investment, it’s not for everyone. The compliance burden is significant, and breaching the rules can lead to severe penalties. That’s why the information we provide is of a general nature, and we recommend that you consult with an SMSF specialist such as ourselves before proceeding. We advise you not to let the location and crashing waves influence your investment decision. Ultimately, the sole Test must be met first. However, if after doing all your research that a seaside property is part of your retirement plan, then let’s meet up and see if we can assist you in making it happen
