Airbnb Rentals

Airbnb Rentals in My SMSF Property

Airbnb RentalThe short-term rental industry is growing rapidly.  Airbnb is credited with being a pioneer in the sharing economy as it allows individuals to offer their homes or other available property on Airbnb hosting sites. Airbnb is probably the most well-known hosting service for short-term accommodation but there are a number of other similar platforms.  In this article we refer to Airbnb but the underlying principals are the same for similar types of platforms. 

Host services such as Airbnb list the property as an on-line marketplace connecting people to rent out their homes and investment properties with people looking for accommodation in specific locations. The types of residential accommodation can range from a room in private residences to a holiday house or rooms in hotels and motels.

  • Can your SMSF purchase a property which is used in Airbnb activities?
  • Can you turn an existing rental property into an Airbnb?
  • Will my Airbnb rental be considered as a business for GST purposes?

The superannuation laws to not prohibit an SMSF from providing host services to the public. However, ensure the SMSF’s trust deed does not prohibit the self-managed superannuation fund from investing in an Airbnb property. It is important to consider if the SMSF Airbnb activities constitute a business and if so, check the trust deed to ensure it is allowed to carry on a business.

We discuss the above questions in more detail below and also consider other issues.

Purchasing a Property by My SMSF for Airbnb Rental Purposes

Airbnb property may be regarded as business real property under certain circumstances.  When the property is used in this way by a member it can be purchased from a member and used by a SMSF to undertake rental activities using an Airbnb platform.  Given the complexity of the superannuation legislation, and severe outcome if the SMSF trustee gets it wrong, it is always precautionary to obtain an ATO private ruling to ensure the member is carrying on a business to avoid legal and compliance issues. Of course, the SMSF must also consider other compliance issues such as:

  • the sole purpose test
  •  arms-length transactions including purchasing the property at market value
  • transparency of the rental operations
  • evidence of rental income and expenses for audit purposes

 Purchasing a property from members of my SMSF or other related parties

An SMSF trustee is prohibited from acquiring residential property from a member or related party. The one exception being residential property which is business real property as defined by the Superannuation Legislation. Business real property includes land and buildings used wholly and exclusively in one or more businesses.

Are Airbnb activities a business?

Generally, the ATO do not view the sharing economy Airbnb rental activities as carrying on a business. Key factors to consider if the rental arrangement is part of carrying on a business include:

  • scale of the operations
  • regularity and repetition with which the SMSF conducts the activities
  • whether the SMSF has a business plan
  • maintains business records
  • is registered for GST 

The ATO have provided a SMSF ruling 2009/1 explaining what business real property is. The following are examples directly from the ATO’s ruling.

Example 17: Bed and breakfast – case 1 – no business

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 business real property of any entity.

Example 18: Bed and breakfast – case 2 – business

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 tax, 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.

Purchasing a property from the public (unrelated parties)

Purchasing a residential property directly from a third unrelated party to use in providing residential accommodation or commercial residential accommodation is not prohibited.  

Can I Change My Existing SMSF Rental Property into an Airbnb?

Yes.

There are no prohibitions in the Superannuation or Income Tax Laws preventing a SMSF from using an Airbnb platform. When changing over consider the following:

  • Traditional long-term rentals vs short-term traveller accommodation
  • Additional work required for cleaning and maintenance done to the property
  • Records required to record when, how long and to whom the short-term accommodation was provided to
  • No personal use of the property by the members, member’s relatives such as children, grandparents etc or other related parties
  • GST considerations 
  • Insurance for short-term traveller accommodations may be different to the usual landlord insurance
  • Members/Trustees cannot provide services such as cleaning and repairs and maintenance except in certain circumstances
  • Vacancy rate
  • Higher rental income yields and taking advantage of seasonal demands
  • Flexibility to change back to long-term rental

Does GST Apply to Airbnb Rental Income?

Residential property is not subject to GST. However, providing commercial residential property can be subject to GST. 

Generally, the ATO do not class that an Airbnb property has the characteristics required to be carrying on a business. It is highly unlikely a residential premise in a sharing economy would be subject to GST liability for the SMSF if it is not also carrying on a business.

However, using the property as an Airbnb rental may be regarded as a commercial residential property under certain circumstances which means the property must be registered for GST subject to the threshold of $75,000.  Thus, if the estimated annual turnover is $75,000 (gross rent) per annum the fund must register and pay GST. This is a very complex area of GST law.  The ATO have provided a ruling GSTR 2012/6 about this topic.

Providing commercial residential accommodation – what does it look like?

The ATO view a property listed on an Airbnb platform which has the characteristics of a hotel room, or a boarding house could be commercial residential premises and possibly subject to GST.

The GST ruling goes through certain characteristics of a property which would point to a property being considered as commercial residential and includes the following:

  • Commercial intention and operated in a business-like manner
  • The premises offer accommodation to the public
  • Management offers accommodation in its own right and not through an agent
  • Central management where reservations are made, rooms allocated, and receipt of payments and services are arranged
  • Accommodation is the main purpose
  • The occupants are guest who are usually short-term traveller’s living away from their usual residence

There are a number of other characteristics which are stated in the GST ruling.

Subject to GST – Example directly from the ATO GSTR 2012/6

 

Example 2 – bed and breakfast accommodation

49. Bob operates a bed and breakfast accommodation business from his premises. The premises contain three bedrooms, communal dining and lounge areas and sealed car parking spaces for guests. The premises contain a room used as an office/reception as well as a kitchen that is suitable to prepare meals for guests. Bob lives on site. He advertises the accommodation in a tourist magazine. The rooms are not self-contained and are cleaned daily during stays and after each stay. The daily cleaning includes replacing towels and making beds. Breakfast is provided in the dining room.

50. Bob operates the premises which are aimed at providing accommodation to travellers (guests). The premises provide accommodation on a multiple occupancy basis. The guests do not have overall control over their rooms. Bob provides central management and services. The accommodation is supplied by Bob in his own right. Bob’s bed and breakfast accommodation has the characteristics of commercial residential premises. The premises have sufficient features to be characterised as being similar to a hotel, motel, or inn. Alternatively, the premises may be characterised as sufficiently similar to a boarding house. Bob’s supplies of accommodation are taxable supplies of accommodation in commercial residential premises.

Not subject to GST – Example directly from the ATO GSTR 2012/6

Example 12 – individual holiday apartments

82. Gus owns an apartment in a block of strata titled holiday apartments. Gus’s apartment is let out for short-term stays during the year through an on-site manager (who acts as Gus’s agent). The on-site manager, who acts as agent in respect to several apartments, provides keys to guests, and cleans the rooms between stays, refreshing items such as linen, towels and the tea and coffee making facilities. The body corporate maintains common areas but does not otherwise involve itself with occupants.

83. The premises are being operated so as to provide accommodation on a commercial basis to travellers (guests) who are temporarily away from their usual homes. The premises are managed by the on-site manager who also provides some services to guests. The manager does not supply the accommodation in their own right, but as agent for Gus.

84. While the accommodation provided through Gus’s apartment does display some characteristics of commercial residential premises, the supply of the accommodation through the single apartment is not sufficiently similar to a hotel, motel, inn, hostel or boarding house to be characterised as accommodation provided in commercial residential premises. The fact that the manager acts as agent in respect to several apartments in the block and offers accommodation in that capacity to several parties at once is not sufficient to characterise the supply Gus makes to the guests through the manager as accommodation provided in commercial residential premises.

If a property has the common characteristics of a commercial residential property, ensure you monitor the rent being received as the test may not initially meet the ATO turnover test but could in a bumper year tipping your SMSF Airbnb into GST territory.  

Do I need to Include Airbnb in my SMSF Investment Strategy?

The SMSF’s investment strategy must include a purchase of a substantial acquisition, like investment in an Airbnb property, to demonstrate that the SMSF has taken into account the associated risks and potential gains. The investment strategy of the SMSF should also take into account diversification and liquidity, which are key areas of focus.  The SMSF to trustee needs to review the investment strategy regularly and update it if required.

Sole Purpose Test -Do not Use the Airbnb personally

SMSFs are required to hold assets for the sole purpose of providing retirement benefits to its members or beneficiaries if the member passes away prior to retirement. 

The bed and breakfast or Airbnb property cannot be used or leased personally by the member, member’s relatives or other related parties unless the SMSF Airbnb activities are classified as carrying on a business. As discussed above the ATO generally do not regard Airbnb activity as carrying on a business.

Severe penalties can be imposed if the sole purpose test is breached.

The shack on the beach would make a great getaway and surely if nobody has booked the accommodation for the weekend can’t I take my family there?  The fund isn’t losing anything.  

This scenario looks reasonable on the face of it BUT the ATO can deem the SMSF as breaching the sole purpose test because the member is receiving a financial benefit.   A member can only stay in the property if it is commercial residential rental property, and they pay market rate for the use of the property to ensure the SMSF is not disadvantaged.

Insure your SMSF Property

Ensure the insurance level for the property adequately covers the additional risk of having multiple people renting a property. 

Cashflow Considerations 

A major consideration is cashflow. Relying on the ebb and flow of the tourist industry can mean high rental yields as a SMSF can take advantage of higher yields in peak season but may not have full occupancy all year round.

Should you Manage the Airbnb Rental Property? 

The SMSF property investment can be managed by the trustees, but they cannot be remunerated for those services. 

An exception would be if the SMSF trustee was in the business of managing rental properties and charged a market rent for those services to the SMSF.

The curious question is, if the SMSF trustee manages the Airbnb rental property and is unable to charge the SMSF for those services as the trustee is not in the business of managing rental properties does the SMSF breach the non arms length expenses (NALE) rules which essentially means the fund must pay market rate for services provided to the fund.  If it doesn’t pay market rate the rental income and capital gains from the future sale of the property could potentially be taxed at 45%.

It will come down to the detail.  If the services are considered insignificant, minor and infrequent it is unlikely NALE will be an issue. 

Best practice is to have the Airbnb managed by an unrelated third party.

Other Tax Implications

Accounting for Airbnb rental income and expenses is no different to any other rental income owned by a SMSF. Net rental income is concessionally taxed at 15% reducing to nil if all of the fund is in pension mode. 

Deductions

Typical rental deductions include repairs and maintenance, cleaning, agent fees, insurance and depreciation on fixtures and fittings.  No depreciation is allowed on 2nd hand fixtures and fittings or for the cost of travel in relation to residential properties. Capital works deductions may be available at 2.5% and reduces the cost base of the property.

However, in the rare circumstance a SMSF is carrying on a business of renting residential premises a deduction may be available for 2nd hand fixtures and fittings and travel to inspect, maintain or collect rent.

Capital gains

The profit on sale of the property is concessionally taxed at 10% if held for longer than 12 months.  Possibly reducing to nil if sold when the fund is in 100% pension mode.

Navigating SMSF Loans for Airbnb Property Investments

A limited recourse arrangement (LRBA) can be used to acquire an Airbnb property. Important considerations include:

  • Borrowings can only be used to acquire a single acquirable asset – items such as stoves, refrigerators and beds are separate single acquirable assets
  • A holding or bare trust is required to hold the asset
  • It is possible to use borrowed money for repairs and maintenance but not for capital improvements
  • Special considerations for purchasing property off the plan
  • Timing of contract and naming the purchaser on the contract is important in relation to stamp duty issues and varies from state to state

Key Takeaways: Investing in Airbnb Properties using My Self-Managed Super Fund (SMSF)

  • A SMSF can purchase a rental property if the trustee’s intention is to list the property on Airbnb
  • A limited recourse borrowing arrangement can be used to purchase a property used for Airbnb rental
  • If the ATO deems the SMSF Airbnb activities to be residential commercial it may be subject to GST
  • Consider who should manage the property
  • The type of investment should be carefully considered and included in the fund’s investment strategy
  • Consider insurance and cashflow 

Do you need help with understanding the issues with your SMSF investing in an Airbnb Property?

Give us a call on 1300 392 544 or get in touch online.

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If you’re interested in learning more about SMSF and Airbnb please reach out for a confidential quote. Simply submit your details and one of our friendly team will be in touch as soon as possible.

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Do you need help with understanding the issues with your SMSF investing in an Airbnb Property?

Give us a call on 1300 392 544 or fill in the form above

Contact Us

If you’re interested in learning more about SMSF and Airbnb, please reach out for a confidential quote. Simply submit your details and one of our friendly team will be in touch as soon as possible.

Contact Us

Name(Required)