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Self-managed superannuation funds (SMSFs) allow trustees to buy residential properties, including holiday rentals, as an investment for a long-term wealth strategy.
However, the rules are strict and the risks of non-compliance are real. As such, careful consideration must be taken if you're looking to invest in a holiday property using your SMSF.
There's undeniable lifestyle appeal in owning property in Australian beach towns. Beyond enjoying sunsets and surf, popular coastal locations such as Byron Bay and Noosa are punching above their weight in terms of short-stay demand, with average occupancy rates of between 80% and 90%.
Capital growth has been strong in lifestyle suburbs too. The Sunshine Coast, for instance, remains among the country's standout residential markets in 2025.
The combination of rental yield potential and long-term appreciation makes this an attractive venture for many investors. For SMSFs, it also provides the diversification benefits of holding physical assets inside the fund.
However, it's important to ask first…
Can an SMSF buy a holiday rental?
Yes, an SMSF can be used to buy a holiday home, provided that you comply with the Australian Taxation Office (ATO) rules.
First, the property must meet the sole purpose test, meaning it must be held strictly for investment purposes and not provide any present-day personal benefit (even indirectly) to the fund's members or their associates.
That said, the property cannot serve dual purposes, i.e., a rental one day and your holiday home the next.
Note that you, your family, or any related parties (business partners, in-laws, friends) cannot stay in it, not even for a single night, while it is held within the SMSF. This rule applies regardless of whether the stay is paid, unpaid, or at market rate.
SMSFs found by the ATO in breach of the sole purpose test may be subject to punitive tax treatment or, worse, have their compliant status revoked.
Another major requirement to ensure compliance is that all transactions related to the holiday home must be conducted at arm's length. This means the SMSF must behave as if it were transacting with an unrelated third party, even if it is not.
- The SMSF must acquire the property at true market value; it cannot underpay or overpay.
- The rent charged must reflect the going market rate. Undervalued rent could trigger non-arm's length income (NALI) tax at 45%.
- Repairs and maintenance must be charged at fair market rates; members cannot provide discounted or free services.
- If a member is acting as a letting agent or manager, they must be paid on commercial terms.
The ATO provides examples of what fails the arm's length test. Income deemed to be NALI will be taxed at the highest marginal rate of 45% instead of the concessional 15%.
What are the financial considerations?
Loan structure
If your SMSF wants to borrow money to acquire a property such as a coastal rental home, it must do so using a limited recourse borrowing arrangement (LRBA). This requires setting up a separate holding trust (aka a bare trust), which becomes the legal owner of the property.
Because of the added risk and regulatory complexity, some lenders may impose tighter lending criteria on SMSF borrowers. You may need to have a higher deposit (typically at least 30%) to be eligible.
While some lenders may cap their loan-to-value ratio (LVR) at 70%, loans.com.au offers SMSF residential loans with up to 80% LVR.
Additionally, it's not uncommon for SMSF loans to have interest rates around 1-2% higher than standard investor loans.
Income volatility
Holiday rentals are notoriously seasonal and unpredictable in terms of income. Summer or school holidays may deliver strong revenue, while low-season or mid-week periods often have weak demand or full vacancies.
Even if your beachside property doesn't generate income, your SMSF must continue to meet all obligations it has - for instance, loan repayments, council rates, property management and upkeep, and any ongoing costs.
That said, your SMSF must have other sources of income so that even if rental income dries up, it won't struggle to meet its legal obligations and create any compliance risk.
Liquidity constraints
SMSFs must remain sufficiently liquid to meet their obligations, especially during the pension phase. However, direct property is an illiquid asset; it can't be quickly sold or split.
If the coastal rental is the only major asset your SMSF holds, it may not have enough liquidity to meet ATO compliance tests or make required benefit payments, especially if members are drawing pensions.
To mitigate this, trustees are advised to maintain diversification by holding liquid assets like ETFs or term deposits. Further, it's best to avoid borrowing too close to the SMSF's maximum capacity.
Is buying a holiday rental a smart strategy for your fund?
Buying a holiday rental through your SMSF can be a viable long-term investment strategy, but only if it's purely treated as an investment. Meaning, zero personal use, strict compliance, and conservative structuring.
It also helps if you understand short-stay markets and invest in high-demand areas with strong rental fundamentals, such as robust infrastructure, interstate demand, and solid growth forecasts. It's not enough that the property is a stone's throw away from the beach.
Always seek expert legal and financial advice to ensure your retirement strategy through this route works within the unique framework and constraints of superannuation laws.
Once you've dotted the I's and crossed the T's and are ready to purchase a coastal rental through your SMSF, our team of lending specialists at loans.com.au is on hand to answer your inquiries and help you apply for the right SMSF loan for you. Book your free consultation today through our website.
Image by Allison Huang on Unsplash
