Real estate owned by SMSFs can be eligible for tax deductions. We look at relevant concessions and tax deductions tied to different types of properties under an SMSF setup.
What Types of Properties are Eligible for Tax Deductions?
Various property types within SMSFs come with their tax benefits. Here’s a quick list:
- – Residential properties (e.g., houses, apartments).
- – Holiday houses.
- – Bed and breakfast establishments.
- – Commercial properties (e.g., shops, factories).
- – Vacant land.
The ATO report for the June 2023 quarter indicates that the total investment in real estate by self-managed super funds (SMSFs) amounts to $126,040 million. This sum comprises $81,204 million in non-residential real property and $44,836 million in residential real property.
Tax Deductions for Residential Properties
Residential properties are homes or apartments the SMSF owns and rents to unrelated third-party tenants. Here are some deductible expenses:
- – Council rates and taxes.
- – Insurance (building, contents, public liability).
- – Advertising for tenants.
- – Property agent’s fees and commission.
- – Some legal expenses.
- – Interest expenses (if the property is utilising a limited recourse borrowing arrangement).
- – Property maintenance costs like cleaning, gardening, pest control, and certain repairs.
What to Know for Residential Properties
The SMSF can claim expenses relating to the property from the day the property becomes available for lease. Additionally, employing a property agent for rent collection and administration is a common practice that bears deductible expenses.
Tax Deductions for Holiday Houses
Holiday houses, often located in tourist areas, are rented out on a short-term basis. Their deductible expenses include:
- – Regular cleaning and maintenance.
- – Advertising for tenants.
- – Insurance.
- – Property agent’s fees.
- – Certain legal expenses.
- – Depreciation on items like furniture, kitchen utensils and bed linen.
It’s important to distinguish between a holiday house and a bed and breakfast. While both can offer short-term rentals, a bed and breakfast typically provides more services like meals and local tours, which incurs additional expenses and, hence, different tax deductions.
What to Know for Holiday Houses
A common concern for SMSFs owning a holiday house is the temptation for a fund member or a relative to use the property for personal purposes during the off-season.
This can be an issue, as personal use of the property is against the rules governing SMSFs, which stipulate that all assets within the fund should solely benefit the members upon retirement — financially benefit them, not provide a recreational retreat.
Additionally, personal use can cause the property to count towards the fund’s “in-house asset” limit of 5% of the fund’s total asset value, potentially leading to regulatory problems if this threshold is exceeded.
Tax Deductions for Bed and Breakfast
Bed and breakfast establishments are like small hotels the SMSF runs, providing short-term stays with breakfast included. Deductible expenses include:
- – Consumables like tea, coffee, milk, biscuits, bread.
- – Cleaning and maintenance.
- – Advertising.
- – Insurance.
- – Property agent’s fees.
- – Depreciation on kitchen appliances, heaters, air-conditioners etc.
What to Know for Bed and Breakfasts
Maintaining a bed and breakfast comes with its own set of rules and additional expenses. Receipts or adequate records for all expenses must be kept as proof of purchase to claim deductions.
Expenses should be paid by the fund whenever possible, and any personal payments by trustees should be reimbursed promptly.
Tax Deductions for Commercial Properties
Commercial properties within an SMSF cover a broad range, including shops, offices, warehouses, and factories.
These properties generate income through rent, often with longer-term leases compared to residential or holiday properties. Here are some deductible expenses:
- – Council rates and taxes.
- – Insurance (building, contents, public liability).
- – Advertising for tenants.
- – Property agent’s fees and commission.
- – Some legal expenses.
- – Interest expenses (if the property is part of a limited recourse borrowing arrangement).
- – Maintenance costs, such as cleaning, gardening, and pest control.
What to Know for Commercial Properties
Commercial properties within SMSFs may be advantageous due to often longer lease agreements and potentially lower maintenance costs.
However, the property’s leasing arrangement must be at arm’s length, meaning the lease should reflect a fair market rate and adhere to commercial leasing laws.
It is also essential to ensure the fund’s investment strategy supports owning commercial property, including understanding the illiquid nature of such an investment and the impact on the fund’s cash flow and diversification.
Tax Deductions for Vacant Land
Vacant land can also be a part of SMSFs investment strategy, although it’s a less common choice. Tax deductions for vacant land mainly revolve around the costs incurred in holding the land, such as:
- – Council rates.
- – Land tax.
- – Insurance.
- – Interest on loans used to purchase the land.
What to Know for Vacant Land
Due to its unique nature, purchasing vacant land as part of an SMSF requires a clear, well-documented investment strategy.
The intent is generally for long-term capital growth or to build a property for income generation. Any development or construction on the land must adhere to SMSF regulations, including not borrowing additional funds to complete construction.
Understanding the ins and outs of tax deductions within different real estate types can significantly benefit SMSFs.
For detailed advice on SMSFs and real estate investments, contact SMSF Loan Experts — we can ensure compliance with relevant laws and regulations. Speak with one of our experts today.
