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Victorian Granny Flat in an SMSF

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.
However, SMSF trustees considering this opportunity must navigate a complex regulatory environment:
Compliance with SMSF Regulations: While the Victorian government’s policy eases the planning permit process, SMSF trustees still need to ensure that any investment in granny flats complies with the Superannuation Industry (Supervision) Act 1993 (SIS Act). This includes the sole purpose test, ensuring the fund’s primary purpose is to provide retirement benefits to its members.

Ownership and Use Restrictions: If an SMSF were to invest in a property and build a granny flat, it must adhere to the rules around ownership and use. The fund cannot lease the granny flat to related parties of the SMSF, such as fund members or their relatives. However, it may be rented to students and singles, with the potential to generate additional income for the SMSF. 

Financing Considerations: For SMSFs needing to borrow funds for such an investment, limited recourse borrowing arrangements (LRBAs) can be used. However, these arrangements come with their own set of rules and financial considerations, including higher interest rates and stricter lending criteria. Of particular importance is the size considerations for SMSF lenders and the location screening which can dictate the loan to value ratio ( LVR) and the important interest rate offered by the lender. Note, not all lenders will accept granny flat SMSF loans, so its best to speak to an experienced finance broker first.

Potential Investment Opportunity: The ease of building a granny flat without a planning permit could enhance the appeal of certain properties for SMSFs, particularly as a means of generating rental income. This could be an attractive option for SMSFs looking to diversify their investment portfolio in the property market or for existing SMSF property owners to add a dual income to an existing larger property.

Professional Advice: Given the regulatory complexities and financial implications, SMSF trustees should seek professional advice from financial advisors, legal experts, and SMSF specialists. This ensures that any investment decision aligns with the SMSF’s strategy and the sole purpose test( SISA 62), which means it must be for retirement benefits and it must be a suitable investment. The transaction must be conducted at arms length( SISA 109) , meaning it must be commercial and it cannot be rented to family and relatives, to ensure that it complies with superannuation laws.

In conclusion, while the Victorian government’s policy on granny flats presents a potential opportunity for SMSFs, careful consideration and professional guidance are crucial to navigate the legal, financial, and regulatory aspects of such an investment.