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FIRST PROPERTY INVESTOR FEATURE

BUYING A HOLIDAY HOME IN YOUR SMSF

associates of the members, will also breach the sole purpose test, Ms Mitchell says, even if they are paying market rent.

For the residential property to be leased to a related party, the investment will need to satisfy the in-house asset rule, where the holiday property must not exceed more than five per cent of the SMSF’s total value.

In addition to legal implications, Mr Beeton points to inconsistent rental income and the conservative attitude of banks towards lending in tourist locations as factors to consider when investors are assessing whether they should buy a holiday home in their SMSF.

FINANCINGA holiday house bought in an SMSF will be in the superannuation fund trustee’s name, and a specific structure has to be in place if the investor plans to borrow.

A limited recourse borrowing arrangement including a custodian company needs to be set up.

According to Mr Beeton, banks will now lend up to 80 per cent for residential property, though there are still restrictions by the bank as to the type of property and income, and serviceability requirements that need to be met.

“They will take into consideration expected rent and the regular superannuation contributions of the SMSF members,” he says. “If you move from an A-grade region to ski towns for instance, generally the bank will only lend up to 50 per cent because of that irregular cash flow for serviceability.”

However, Ms Mitchell notes that other strategies, such as releasing another asset, could offer a more effective approach.

One of her clients originally planned to

Purchasing a holiday home could offer investors a diversification of asset classes in their self-managed super funds. However, there are rules involved that could have severe implications if breached, writes Christina Zhou

improvements to the property, depending upon whether you use borrowed funds for the purchase or not.”

Director of accounting services Younis and Co, Naomi Mitchell, who oversees over 120 SMSFs, also stresses the importance of complying with the laws.

Any use of the holiday house must be incidental, remote and insignificant, she says, referring to the Australian Taxation Office’s (ATO’s) Superannuation Ruling (SMSFR 2008/2) for what is an acceptable “incidental advantage” and what isn’t.

“The ruling gives 16 examples of situations that commonly arise in SMSF investments and outlines what factors the commissioner will apply when deciding on the acceptability of the advantage,” she says. There are two examples that concern holiday homes.

According to the ATO, the benefit must be “merely an incidental benefit”.

For example, if an investor needs to stay at the holiday property to carry out maintenance, they must pay normal market rates in accordance with the sole purpose test and in-house asset rules in these circumstances.

Renting the property to your relatives, or

uying a holiday home in your self-managed super fund (SMSF) can be an attractive option. While investors

will not be able to live in the property before retirement, they can contribute to the fund while they’re working and take it out through their pension to use as a retirement home.

Though this is a legitimate strategy, investors need to be very clear on the limitations of this type of asset class.

RESTRICTIONS TO CONSIDERThe first thing to consider is the restrictions on the use of the holiday home.

Founder and managing director of the SMSF Club, Justin Beeton, who provides investment education to SMSF trustees, says any investment in the super fund must be in line with superannuation laws.

“The two main laws that apply to property are that the property must be for the sole purpose of providing an income in retirement – the sole purpose test – and any purchase must be from an unrelated party, unless the property meets the definition of business real property,” he explains.

“There are also limitations on making

FIRST PROPERTY INVESTOR FEATURE

may 2013 www.spionline.com.au 75

Buying a holiday home in your SMSF

borrow to purchase a holiday home privately. They already owned a factory worth $800,000 in their own names, and they had $500,000 in their SMSF. So they borrowed $300,000 from the bank to put into their super. They then had the funds to buy the holiday home privately.

“So quite often, it’s just about doing a restructure, moving some of the properties,” Ms Mitchell says.

Tax benefiTsWith attractive tax advantages to buying a property in an SMSF, says Mr Beeton, this is certainly something investors should consider.

Assuming the investor has fully repaid the borrowing of any limited recourse loan used to acquire the property, investors can start reaping the benefits when they retire.

“Once you get to retirement and start drawing your pension, the capital gains tax is zero. Any rental income is also tax free once you are in the pension phase,” he says.

John Drakakis, financial planner and accountant at Brisbane-based Snelleman Tom, who looks after around 200 SMSFs, outlines the tax benefits available to investors at different stages in their work life.

During the accumulation phase, the net rent after expenses is only taxed at 15 per cent, Mr Drakakis says. In the accumulation phase, capital gains tax is10 per cent if the investor sells the property after owning it for 12 months, and 15 per cent if it’s sold within 12 months.

High income owners, Mr Drakakis explains, therefore, are most likely to benefit from the tax advantages.

“Rent generated from a property doesn’t count as a tax contribution, it just counts as income to the fund. Interest costs associated

with borrowings are tax deductible,” he says.

WhaT can go Wrong?Making sure your fund is compliant becomes even more important for investors seeking to purchase this asset class, as there have been many instances where the ATO have ‘cracked down’ on holiday homes.

“The ATO has selected a fund for audit because in the annual tax return lodged for the superannuation fund there was an investment in residential real property reported, but no rental income received reported,” Ms Mitchell says.

Through the audit, the ATO would discover that members of the fund have been using the property for private use, hence, breaching the sole purpose test.

“Sole purpose test breaches are taken very seriously by the ATO and the courts because the trustee in breach has fundamentally misused the superannuation system,” she explains.

Once the ATO knows a breach has occurred, they have a range of options available, including:

Administrative penaltiesAccepting an undertaking by the trusteeDisqualification of the trusteeDisqualification of the auditor or referral to

their professional bodySuspension or removal of trusteeInvestigation and seizure of assestsCivil and criminal penaltiesRemoval of the fund’s complying status

“‘Don’t use it’ is basically the message that comes through,” Ms Mitchell continues. “Let it be someone else’s holiday, not yours.”

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Holiday Home: a case study

Net wortH of super fuNd: $9,470,000property purcHase price: $1,190,000

locatioN: The Entrance, north NSW (beachfront property)

reNt acHieved: $55,000 annuallylaNd tax: $940,000 (average land tax value for 2013)

assumptioNs aNd tax coNsideratioNs:No other properties held by SMSF and therefore entitled to full

threshold of $406,000The SMSF is a complying fund and not in pension phase. Net

rental earnings will be taxed at 15 per centextra costs:

Stamp duty: $50,940Borrowing costs from the bank (establishment fee):

$1,500 to $2,000 depending on the loanOther costs (eg solicitor) :$1,500 to $2,000

(depending on the deal)