The allure of earning higher rental income compared to traditional leasing has prompted many investors to explore this avenue, particularly in popular tourist destinations like Melbourne, Sydney and Brisbane.
However, before jumping on the bandwagon, it's crucial for SMSF trustees to understand the income tax implications and other considerations that come with operating an Airbnb property.
Ensuring a Comprehensive Investment Strategy
Before an SMSF decides to invest in an Airbnb property, it is crucial for the trustee to carefully review the fund's investment strategy, ensuring that it accommodates the risks linked to this specific rental arrangement as well as the challenges related to asset liquidity. While the rental income from hosting services on Airbnb may be significantly higher than traditional long-term renting, the investment strategy should be properly documented to demonstrate a well-considered approach.
Sole Purpose Test
Compliance with the sole purpose test is of utmost importance for SMSFs investing in Airbnb properties. The sole purpose test mandates that the SMSF's assets are held for the sole purpose of providing retirement benefits to its members. Therefore, leasing the property to a related party, such as a family member or a fund member, could potentially breach the sole purpose test and expose the SMSF to penalties.
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GST Considerations
An Airbnb property holds the potential to be categorised as a commercial residential premise within the context of the sharing economy. This classification gains significance as per the ATO ruling GSTR 2012/6, which specifies that when the trustee of a Self-Managed Superannuation Fund (SMSF) intends to list a property on Airbnb and the property exhibits characteristics akin to those of a hotel room, it can potentially be considered as commercial residential premises. The ATO issued a ruling outlining the common characteristics of a commercial property, which includes multiple occupancy, commercial intention, the provision of services, and facilities, and being open for lease to the public.
When the Australian Taxation Office (ATO) designates an SMSF's activities as providing commercial residential accommodation, the implications mirror those applicable to hotels and motels. This equivalence implies that the rent generated from the SMSF's Airbnb endeavours could lead to the imposition of a Goods and Services Tax (GST) liability. To elaborate further, if the anticipated annual turnover resulting from the SMSF's Airbnb activities exceeds $75,000, the SMSF becomes obliged to register for GST with the ATO.
Consequently, SMSF trustees considering Airbnb operations must be well-versed in the ATO's guidelines and rulings to accurately assess their tax obligations. This involves a comprehensive evaluation of the property's characteristics in relation to commercial residential premises and its alignment with the parameters outlined in GSTR 2012/6. Moreover, SMSF trustees should diligently monitor their annual turnover to determine if it surpasses the $75,000 threshold, which triggers the requirement for GST registration.
Can I Sell My Airbnb Properties to My SMSF?
Exercising caution is imperative when dealing with related parties in the context of operating an Airbnb property within a Self-Managed Superannuation Fund (SMSF). Typically, an SMSF is restricted from procuring residential properties from related parties, with exceptions only applying to commercial properties and listed shares. Therefore, the focus shifts to whether Airbnb properties can be classified as business real property, a circumstance that is relatively uncommon.
The concept of business real property primarily encompasses land and buildings exclusively utilised for business purposes, as outlined in SMSFR 2009/1. For business activities involving residential properties, such as farming or property trading, their substantial nature is essential to fulfilling the classification criteria. Pertinent legal cases within SMSFR 2009/1 offer valuable insights:
- Ms Hend owns two holiday flats, which she lets for short-term accommodation at a popular holiday destination. Ms Hend and her partner manage and maintain the flats, which includes cleaning and repairing the flats, and financial tasks such as banking. Ms Hend and her partner set up the Hend SMSF and both became members of the fund. They propose that Hend SMSF acquire the flats from Ms Hend. The elements of repetition and continuity of acts and transactions indicate the possibility of there being a rental property investment business being carried on. However, the scale of the operation is such that it is not considered to be a business. As there is no business conducted in respect of the premises, the property is not business real property. Any sale of the flats to the Hend SMSF would contravene the related party asset acquisition rule in section 66.
- The Ngo family own their large family home. During the school holidays, they allow guests to stay on a bed-and-breakfast basis. Three of the bedrooms are used for guests, while the members of the family use the remaining rooms. The scale of this operation is not sufficient to establish the existence of a business. The property is therefore not a business real property of any entity.
- Dean Lamont owns a house with 5 bedrooms and 2 living areas. He uses one of the bedrooms himself. The other four bedrooms are let year-round as part of a bed and breakfast business. One living area is set aside for the exclusive use of guests. Breakfast is included in the room cost and other meals are available by arrangement. Dean advertises his rooms with Worldwide B&B Internet bookings agency. Dean has a business plan, pays taxes, and has three permanent part-time employees. The business has operated since Dean acquired the house 17 years ago. In this case, a business is being carried on. Dean's non-business use of the property is incidental and relevant to that business. Accordingly, the property is used wholly and exclusively in the business and is business real property.
In order to determine whether a business is being carried on by the relevant entity, the ATO in its Ruling considers the following factors:
- the scale of the relevant entity's leasing operation is a key consideration;
- the regularity and repetition with which the owner of the property conducts the activities;
- the nature of the operation: are there indicators of activity being undertaken which take the activities from mere investment activities to the conduct of a business;
- whether the entity asserting that it is carrying on a business: has a business plan; maintains business records; has an ABN; is registered for GST purposes.
For SMSF trustees uncertain about whether their property meets the business real property definition, seeking specific guidance from the ATO is a prudent step to ensure compliance and clarity.
The increasing popularity of SMSFs investing in Airbnb properties offers exciting prospects for higher rental income. However, it is essential for SMSF trustees to be well-informed about the tax implications and comply with the necessary regulations, such as the sole purpose test and potential GST obligations.
Seeking professional advice from financial advisors or accountants familiar with SMSF regulations and tax laws is highly recommended before embarking on this investment journey. By carefully navigating the complexities, SMSFs can enjoy the benefits of this emerging trend while safeguarding the future financial security of their members.
Harry O'Sullivan
