Q: My question is similar to one published recently. I’m looking at investing in vacant land through my self-managed super fund (SMSF) that I intend to eventually retire to with my wife. In the interim, I’d like to make use of the space by building a unique dwelling (a bus restored as a mini-house) and rent it on Airbnb, with any money made being put back into the super fund. If we intend to only visit the property for maintenance and upkeep, and all revenue earned from renting out the property is directed back into the super fund, is this allowed? My main concern is that I’d be making improvements to the property with my own money, and I’m not sure if that’s allowed in a SMSF situation. Realistically, I’d be happy to purchase the property and do nothing with it (allowing the value to increase over time and ensure I have a retirement block to go to when the time comes to stop working). But I figure if it’s feasible to make a few thousand dollars a year in rent and put it into my super, it’d be a better idea. Michael.
A: While it may seem like a novel idea to convert a bus into a mini-home on vacant land paid for by your super savings to secure a place to retire to, it is not exactly a simple exercise. This is because of superannuation rules you will need to keep in mind when considering such an enterprise, says accountant Brad Eppingstall, a director of RSM Australia in Ballarat.
Most important – in order for your SMSF to justify buying the land on which you will build your “unique” dwelling that you will rent out – is being able to show that what you propose is a viable business enterprise.
The way you describe your venture is that your SMSF will buy a vacant block of land on which you will develop a property and then run it as a rental accommodation business. While there is nothing stopping you from setting up a mini-house on a vacant block with your own money, what may be more difficult is getting your SMSF involved.
When SMSFs buy into a member’s business, the property asset they acquire is the underlying real estate from which the business is run. That’s the investment they make and you need to be able to show it is a viable business capable of paying the rent because, as well as owning a property, the return to your fund is the lease income your business will pay the fund.
While it is possible you are trying to make your development look like a business, says Eppingstall, if the idea is based on having just one bus converted to a mini-house you will struggle to make the income it will generate look like a business. With any business real estate property exercise, the scale of the operation is an important aspect.
As far as the concerns you have, if it’s an investment that satisfies a business real property definition there is nothing stopping you from improving it. If you have any surplus taxable income, you can also contribute this to super within the contribution limits. As far as only visiting the property for maintenance and upkeep, you appear to be aware that SMSF members are not permitted to live on a property owned by their fund.
There is an important and useful SMSF ruling issued by the Australian Taxation Office (SMSFR 2009/1) that details a host of property investing ideas for SMSFs. As an example, vacant land bought by an SMSF can be a business property if the members run a farming business from it.
Q: Your recent question on gold investing by SMSFs said that if gold bullion is stored in a bank safety deposit box, this could be problematic for the fund auditor. Why might this be so? Tony
A: While Belinda Aisbett of Melbourne specialist audit firm Super Sphere has no objection to an SMSF storing gold in a bank safety deposit box, she says there are audit considerations and issues with such investments.
If the fund is using a bank deposit box, says Aisbett, it would be expected that the fund pays for the cost. It should be a stand-alone box and fund members should not be storing personal items in the fund’s bank deposit box.
When reviewing a gold bullion investment, an auditor will need to be satisfied the gold is not being stored in the bank for any other reason – for instance, security for a loan. To address this, it would need either representations from the fund trustee or a bank audit certificate that covers the deposit box.
Sighting the bullion would also need to be arranged, and the auditor will need to be comfortable the items are in fact gold, and that the identifying references are consistent from year to year. Gold bars, for instance, can be branded as coming from a recognised source like the Perth Mint or ABC Bullion, for example, and stamped accordingly. Purchase and sales documents of any gold investments would need to be kept.
The extent of the audit testing, says Aisbett, would be dictated to a certain degree on how much gold is held by the fund.
The fund’s investment strategy would need to be reviewed: does it permit investing in gold and investing in non-income-producing assets? Also bear in mind the Australian Taxation Office focus on investment diversification after cases involving auditors – the Baumgartner and McGoldrick cases – which highlighted the obligation of SMSF auditors to verify in the financial statements of the SMSF at the end of each year that assets are held at market value. This means there is a greater interest in monitoring investments by auditors.
While insurance is not a superannuation industry requirement as gold bullion doesn’t fall under the definition of personal use investments, depending on where the gold was held, insurance would be considered in terms of the trustee managing their own risks and discharging their obligations to act in the best interest of their fund and to safeguard fund assets.
Email journalist John Wasiliev with your questions at firstname.lastname@example.org.