The potential of earning a higher rental income while getting more flexibility and control has attracted many property investors to short-term rentals. Airbnb is the pioneer and most popular platform in the short-term rental industry.
As an SMSF trustee or member, you’re probably wondering whether you can list your fund’s investment property on Airbnb and generate more income to set yourself up for retirement.
The short answer is yes, you can list your SMSF investment property as a short-term rental.
But it’s not that straightforward. There are many factors, tax considerations, common pitfalls, and other considerations to have in mind.
This article provides a comprehensive guide on the feasibility, benefits, and challenges of Airbnb rentals within an SMSF.
Understanding the Sole Purpose Test and Restrictions for Related Parties
The sole purpose test is an SMSF regulation that requires fund trustees to maintain and operate an investment property for the sole purpose of providing retirement benefits for the members or dependants in case of death.
The sole purpose test means the members cannot use the property for personal benefits. It also restricts the fund from leasing the property to, related parties, friends, business associates, and relatives.
According to the Australian Tax Office (ATO), related parties include the following:
- All fund members
- Associates of the fund members, including the relatives and business associates of each member, the spouse and children of those business associates, companies controlled by the members or business associates, trusts controlled by the members or business associates
- Standard employer-sponsors who are the employers who contribute to your fund for the benefit of a member
- Associates of standard employer sponsors, including businesses or companies controlled by the employer and trusts and companies that control the employer
In the context of short-term rentals, listing your SMSF investment property on platforms like Airbnb must align with the sole purpose test to avoid regulatory breaches.
Breaching the sole purpose test could lead to severe civil and criminal penalties.
How To Integrate Airbnb into Your SMSF’s Investment Strategy
Aligning Airbnb Rentals with the SMSF’s Investment Objectives
Before investing in Airbnb rentals through your SMSF, it’s essential to carefully go through the fund’s investment strategy to determine whether the investment aligns with the fund’s objectives.
An SMSF investment strategy is the blueprint that outlines how the fund plans to obtain, hold, and realise assets that are consistent with the fund’s objectives and members’ retirement goals. It should also explain how and why you’ve chosen to invest your retirement benefits to meet these goals.
Your SMSF investment strategy should be flexible enough to accommodate Airbnb rentals so that the investment is consistent with your long-term retirement objectives.
Assessing the Financial Viability and Risk Management
Despite the numerous potential benefits, investing in Airbnb rentals comes with various risks. You must carefully consider each of them to assess the viability of the investment.
The short-term rental industry is highly affected by seasonality. Solely relying on the constantly changing flow of tourists can lead to cash flow issues. It’s important to keep in mind that you won’t experience full occupancy all year round.
For example, you can enjoy high occupancy rates and a solid flow of income during the high season (December-February) and shoulder season (March-May and September-November). On the other hand, the low season (June-August) has a low flow of tourists and you’re likely to experience a low stream of income.
Due to these risks, it’s important to have contingency measures and financial buffers in place. For example, we recommend you get an appropriate insurance cover to help you cover the cost of property repairs, bodily injuries on guests, and theft.
Evaluating the Impact on Long-Term Retirement Goals
SMSF trustees should regularly review the performance of the Airbnb property as part of the fund’s overall investment strategy.
At the end of the day, the Airbnb investment should be for the sole purpose of providing retirement benefits for the SMSF members. The income generated from the short-term rental should align with this goal.
Once you’ve set a goal, you can then continuously assess the performance of the investment property based on the targets. Track various metrics that contribute to a short-term rental’s performance, such as occupancy rate, generated income, and accrued expenses.
Be mindful of renovations and improvements to the property
Chances are that you’ll need to do some renovations and improvements to make the Airbnb property appeal to potential guests. However, you need to ensure that the upgrades and improvements align with superannuation rules and regulations to avoid compromising the fund’s compliance status.
One of the laws to observe when carrying out renovations and improvements on your SMSF Airbnb rental is the replacement asset clause. This clause states that improvements made on an SMSF property must not alter the character of the original asset.
Additionally, if you’ve obtained a loan through a Limited Recourse Borrowing Arrangement (LRBA), you are not able to use the borrowed funds to make any improvements to the property.
Benefits of turning your SMSF property into an Airbnb
Potential Income and ROI
Potential rental income is the main reason why many Australians are attracted to Airbnb rentals due to the high rental yield that can be achieved.
The steady income from the Airbnb rental is great for building a stable income for the SMSF and also providing retirement benefits for the members once they’ve reached the pension phase.
Alongside the rental income, coupled with the capital growth of the property will prove to be a great way to increase returns and help meet your retirement goals.
Flexibility and Control
Short-term rental properties give you a different level of flexibility and control that traditional rentals lack. Unlike traditional properties where landlords are tied into long-term contracts, Airbnb property owners only lease out the property when guests need them.
You’re also not tied down to specific market rental rates. You can set your daily rate as high or as low as you’d like based on different factors, such as location, demand, and amenities.
Implementing a dynamic pricing strategy where you increase your rates during the peak season and lower them during the low season is the best way to take advantage of seasonality.
You also have the option of selecting who you host in your property through guest screening. You can screen your guests by reviewing guest profiles, reading reviews from previous hosts, and having a conversation with them.
If market conditions change or you no longer wish to rent the property on Airbnb, you can always convert it into a traditional long-term rental.
Diversification of Investment Portfolio
Diversification is an important factor for all investors. Listing your SMSF investment property on Airbnb is also a diversification and risk mitigation strategy. You minimise risks while maximizing potential returns.
For example, your SMSF can invest in both traditional and short-term rental properties to balance the risks and benefits of each investment type.
You still enjoy a rental income from your long-term properties during the low season when short-term rental bookings are low. Similarly, you enjoy income from your Airbnb when your long-term tenant moves out and your traditional property is vacant.
This enhances your investment portfolio and makes it more resilient.
On top of that, you enjoy property value appreciation over time, which can contribute to the overall growth of the SMSF’s assets.
Tax Benefits and Deductions
You can expect to enjoy a 15% tax rate on the rental income received from your Airbnb because it’s within an SMSF which is much lower than personal income tax rates. Additionally, you can also enjoy several deductions too.
Some fully deductible Airbnb property expenses include furniture and appliance depreciation, cleaning, repairs and maintenance, listing costs, Airbnb commissions and service fees, and property insurance.
To enjoy these deductions, the ATO demands that your fund meticulously keep a record of all rental income and deductible expenses for up to five years. Staying on top of your record keeping is especially important for long-term tax benefits and deductions, such as asset depreciation.
Property investors often have to pay capital gains tax (CGT) on selling a property with value that appreciated over time. Fortunately for SMSFs, you might be eligible for CGT exemptions. If your SMSF owned the asset for over 12 months, you receive a one-third CGT discount.
Key Considerations When Turning Your SMSF Property into an Airbnb
GST Considerations
Goods and Services Tax (GST) doesn’t apply to a residential property. However, the ATO may consider an Airbnb rental as a commercial residential property in the context of a sharing economy. This may make the income from the property subject to GST.
According to the ATO ruling GSTR 2012/6, if an SMSF trustee intends to list the property as a short-term rental with features similar to a hotel room, it can be considered a commercial residential premises.
In this ruling, the ATO provided a list of characteristics that qualify a property for a commercial residential property. Such characteristics include:
- Commercial intention and managed in a business-like manner
- Multiple occupancy to guests who are typically short-term travellers staying away from their usual premises
- Provision of services and utilities
- Being open for lease by the public
- The main purpose is accommodation
- Management provides accommodation in its own right, not through an agent
- Central management where bookings are made, rooms allocated, and payment receipts issued
If the fund’s estimated annual rental income from the Airbnb property is $75,000, you must register your fund for GST with the ATO.
SMSF trustees must continuously monitor the rental income from their Airbnb properties to determine if it meets the $75,000 threshold which triggers the need for GST registration.
Property Management Options
Managing an Airbnb rental isn’t an easy task. Some key responsibilities involved in managing an Airbnb property include guest communication, cleaning, maintenance, and handling bookings.
Sure, you can take on these tasks yourself. But do you have the time and energy to become an Airbnb host? Do you have the patience to answer guests when they ask one question for the 99th time? Can you handle the pressure of addressing guests’ concerns fast?
Also, remember that SMSF trustees who choose to self-manage the Airbnb rental cannot be remunerated for their services to comply with SMSF regulations.
These tasks can be time-consuming and overwhelming, especially for first-time hosts. If you’re already committed to other tasks, say your full-time job, juggling more commitments could be a challenge.
Your priorities when it comes to Airbnb property management should be handling issues with speed, communicating efficiently, and staying organized when it comes to cleaning and maintenance.
This is why it might make sense to hire a professional Airbnb property manager. They can handle all management tasks while you focus on other aspects of your SMSF.
Administrative Burden
Compliance with SMSF laws and regulations is one of the most important aspects of operating an SMSF. Failure to comply could lead to severe consequences, such as loss of your Airbnb listing, civil and criminal penalties, and even imprisonment.
This calls for a high level of maintaining accurate records and financial reports. Keep accurate and timely records of daily and monthly rental income, bookings, property expenses, guests, and booking periods.
Accurate and up-to-date records also come in handy when claiming tax deductions. Your financial history plays a huge role in both short and long-term deductions.
On top of that, SMSF trustees are legally required to regularly hire an independent auditor to conduct financial and compliance audits. The independent auditor relies on the fund’s financial records to determine whether the fund is compliant with superannuation rules.
Staying on top of these administrative responsibilities can be a challenge. But you can employ various Airbnb tools and software to help you automate your bookkeeping and records.
Let us find the perfect Airbnb SMSF property for you
Listing your SMSF investment property as a short-term rental on Airbnb can be your fund’s recipe for success. But just listing it isn’t a guarantee that you’ll now hit your retirement goals. You must balance the high returns potential with staying compliant with superannuation laws and regulations.
That’s why working with an experienced SMSF Buyer’s Agent is crucial. Our expert team will help you find the perfect investment property for your SMSF to list on Airbnb. Not only that, we also provide property management services to help ensure all bases are covered.
Contact us today for a consultation and let’s make your investment dreams a reality.