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Victorian Granny Flat in an SMSF

Summary

opportunities for Self-Managed Super Funds, SMSFs investing in Victorian granny flats

 

Victorian Granny Flats in an SMSF: Rules & Investment Tips

The Victorian government’s recent policy change, allowing granny flats to be built on properties without a planning permit, opens up new opportunities for Self-Managed Super Funds (SMSFs).

This policy simplifies the process of constructing small secondary homes, including granny flats, on properties of 300 square meters or larger, without the need for a planning permit. This development could be particularly interesting for SMSFs, given the potential benefits in terms of investment and property diversification.

Investing in granny flats within a Self-Managed Super Fund (SMSF) can be a lucrative strategy for property investors in Victoria. However, it’s essential to understand the rules and regulations before embarking on this journey.

Can Granny Flats Be Built with Borrowing or a Loan?

Under the Superannuation Industry (Supervision) Act 1993 (SIS Act), SMSFs can borrow funds to acquire property using a limited recourse borrowing arrangement (LRBA). However, any renovations or improvements to the property purchased must not fundamentally change the nature of the asset. This is crucial when considering the construction of a granny flat.

Key Rules for Building a Granny Flat with Borrowing or Loan in an SMSF:

  1. No New Assets:
    The addition of a granny flat must not constitute a “new” asset. If building a granny flat significantly changes the character of the existing property, it may breach the borrowing rules.

  2. Allowed Improvements:
    Minor renovations and improvements are allowed under an LRBA, as long as they don’t alter the fundamental nature of the original asset. This includes upgrades like adding a granny flat if it’s not treated as a separate dwelling.

  3. Funding Source for Improvements:
    Renovations or improvements (such as a granny flat) must be funded with SMSF funds directly or from accumulated savings, not from borrowed funds.

Key Investment Tips for Granny Flats in SMSFs

  1. Lease Agreement Considerations:
    Ensure that any lease agreements for granny flats comply with the “arm’s length” principle. The rent charged should be at market value to avoid contravening SMSF rules.

  2. Granny Flat Strategy:
    Develop a clear investment strategy that includes the granny flat as part of your SMSF’s property portfolio. Outline the expected returns and compliance measures.

  3. Compliance with State Regulations:
    In Victoria, granny flats must adhere to the state’s building and planning codes. Make sure the property meets the requirements before including it in your SMSF.

  4. Seek Professional Advice:
    Given the complexities of building granny flats with borrowed funds, it’s wise to consult an SMSF specialist or financial advisor before proceeding.

Conclusion

Investing in granny flats through an SMSF can offer significant returns, but careful planning is required to ensure compliance with both superannuation and state regulations. While it’s possible to build a granny flat using SMSF funds, borrowing to fund its construction or altering the property’s fundamental nature could breach super laws. Stick to the rules, develop a solid strategy, and consult professionals for the best results.

 

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