Australians are always looking for new ways to maximise their investment in their superannuation funds. This is why so many decide to set up self-managed super funds (SMSF), then look for innovative ways to get the best return possible. Buying property through an SMSF has been possible in the past, but can you buy a holiday home using an SMSF? Not only is the answer to this question yes, but SMSF’s can now borrow money to invest in holiday property - a perk that was previously unavailable to SMSF operators.
This option not only frees up available cash for investors to buy property, it also provides some breathing space in their budget, allowing them to invest in a property they may not previously have been able to afford. If the specific purpose of the property is to be a holiday home however, there are some important things to understand when it comes to purchasing through an SMSF.
The numbers have to work
Just like any ordinary loan, your SMSF must provide evidence of available funds and capacity to make repayments on the balance owed. Most property purchases through SMSFs are for investment properties, where rental income can cover mortgage repayments. In the case of holiday home, this may not always be possible and making additional contributions to the funds to cover loan repayments may solve this issue. In addition, there are the general expenses that come with owning an investment property such as body corporate fees, property management fees, cleaning and maintenance costs, rates and utility costs. An important point to note is that any assets held by an SMSF cannot benefit any of its members directly and must only be held as provision of retirement benefits to fund members. This means that purchasing a holiday property through the SMSF becomes purely a business decision, not a lifestyle asset for you and your family to enjoy.
You have to know the rules
Being part of an SMSF is a big responsibility and fund members must understand what their obligations are in relation to legislation, taxation and rental income. This includes: being familiar with the Superannuation Investment Scheme Act; knowing the relevant phases of your SMSF and the taxation rate that will be applicable to each one and on capital gains; understanding how borrowed funds can be used with relation to the property (for example, funds can be allocated for repairs and maintenance but not improvements). It’s essential to have a good financial adviser or accountant to support you and other members of your SMSF, not only to maximise the available opportunities but to avoid serious penalties for mistakes made due to simple oversights and misunderstandings.
Is it really the best investment for your SMSF?
Adding a commercial or residential investment property to the assets in your SMSF is a great idea, but it’s important to consider the amount of work and expense involved in owning an investment property, and whether the return is going to be worth the effort in the long run. Any investment property has its share of general costs such as repairs, maintenance, rates, and utilities. A holiday home however, will incur additional costs to cover the needs of its guests. An initial layout for furnishings, linen, appliances and entertainment will be required, but the ongoing costs can also be higher. When purchasing a holiday house as an investment, location is crucial and busy destination towns with a transient tourist population can be more expensive, especially when it comes to local contractors and service providers such as cleaners, gardeners and handymen. There is also the insecurity of inconsistent rental income, especially in the off-season.