Though superannuation was first intended to be a means of saving money for retirement, many people are curious as to whether they can use it to assist in the purchase of real estate.
Investing in property can be a great way to build wealth and secure your financial future. But what if you don’t have the upfront capital to purchase an investment property? Can you use your superannuation savings to make your dream a reality?
The answer is yes, you can use your super to buy an investment property in Australia, but it’s not as simple as withdrawing the money and making a purchase. There are specific rules and regulations that you need to follow, and it’s important to understand the potential benefits and drawbacks before making a decision.
How to Use Your Super to Buy an Investment Property
There are two main ways to use your super to buy an investment property:
1. Through a Self-Managed Super Fund (SMSF)
An SMSF is a type of superannuation fund that gives you greater control over your investments. With an SMSF, you can choose to invest in a wide range of assets, including property.
To purchase an investment property through your SMSF, you will need to ensure that the property meets the following requirements:
- Sole purpose test: The property must be solely used to provide retirement benefits for the members of the SMSF. You cannot use the property for personal use or rent it to family members.
- Related parties: You cannot purchase a residential property with an SMSF from a related party, and you cannot rent that property to a related party or transfer your existing residential investment property into your super fund.
- Market value rule: All investments by your SMSF must be made on a commercial ‘arm’s length’ basis. So, investment properties must be valued at current market value and any leases also need to reflect current market value in the open market for a property of that type.
- Assets in the name of fund: It is a legal requirement of SMSFs that you invest in assets in the name of the fund – not in your own name.
- Borrowing arrangements: If you don’t have enough funds in your super to buy a property outright, you may be able to establish a limited recourse borrowing arrangement (LRBA). This is a specific type of loan for SMSFs that allows you to borrow funds to purchase a property. The property is held in a separate trust until the loan is repaid.
- Property acquisition costs: Your SMSF must cover its own expenses related to purchasing the property, such as legal fees, stamp duty, and title transfer costs. However, it’s crucial to ensure these costs are directly related to the property purchase and comply with superannuation laws.
2. Through the First Home Super Saver Scheme (FHSS)
The FHSS is a government scheme that allows first-home buyers to use their superannuation savings to save for a deposit on their first home. This can be a great way to boost your savings and get into the property market sooner.
However, there are some eligibility requirements that you need to meet to participate in the FHSS:
- You must be a first-home buyer
- You must be under the age of 18 when you make your first contribution
- You must not have previously owned a property in Australia
- You must live in the property for at least six months within 12 months of buying it
Benefits of Using Your Super to Buy an Investment Property
There are several potential benefits to using your super to buy an investment property:
- Tax benefits: Holding business real property in an SMSF can offer numerous tax benefits as SMSFs are tax-effective structures with super funds taxed at a rate of only 15%, which is significantly lower than other tax rates outside of super. Furthermore, owning your business premises in an SMSF and renting it to your business entity can lead to tax efficiency.
- Diversification: Property can be an excellent addition to your investment portfolio, providing diversification and potentially reducing risk. This can be particularly beneficial if your superannuation fund is heavily invested in traditional assets like shares and bonds.
- Asset growth and protection: SMSFs give you the ability to use your superannuation savings to help purchase a property investment.
Drawbacks of Using Your Super to Buy an Investment Property
While there are potential benefits to using your super to buy an investment property, there are also some drawbacks that you need to be aware of:
- Cash flow: Owning a property within an SMSF can pose cash flow challenges as property is relatively illiquid compared to other assets like shares. Ensuring that your property generates sufficient cash flow to cover your expenses is essential to maintain your fund’s financial health. Moreover, when SMSF members reach the pension phase and start drawing income from their super, the minimum pension payment requirements must be met so planning for adequate cash flow is essential to meet these pension requirements without facing liquidity issues.
- Set-up and ongoing costs: Property investments within a Self-Managed Superannuation Fund (SMSF), generally incur greater set-up costs, especially when utilising an LBRA. In addition, SMSFs are separate entities with their own financial obligations, including property-related expenses and taxes which require annual tax returns and audit services that will incur additional expenses.
- Complexity: SMSF property investment is complex. And, as trustee of the SMSF, you will be solely responsible for all the investment decisions and compliance with the rules and regulations. If you decide to navigate this path, it’s critical you seek professional advice to help run the fund and advise you accordingly so that you can navigate through the rules and regulations.
Using your super to buy an investment property can be a great way to build wealth and secure your financial future. However, it’s important to carefully consider the potential benefits and drawbacks before making a decision. If you are considering using your super to buy an investment property, it is important to seek professional advice from a qualified financial advisor. They can help you understand the risks and benefits involved and make sure that this is the right strategy for you.
Use a self-managed super fund (SMSF) to buy an investment property
Superannuation funds are available to Australians for the purchase of investment real estate, but only investment real estate.
You and the other members of a self-managed super fund (SMSF), which can have one to four members, can decide how to invest your superannuation. This includes making purchases of investment properties,
Since creating an SMSF is a highly regulated process, it’s a good idea to consult a financial advisor to fully understand your responsibilities and set up the fund.
This is the amount of deposit you will need to save if you’re buying a home to live in.
You can only use your superannuation to buy investment properties. Picture: Getty.
How does the FHSS scheme work?
Through the FHSS program, qualified prospective homeowners can increase their superannuation contributions, which they can then take out when they’re ready to purchase a home.
You can contribute up to $15,000 per fiscal year, or a total of $50,000, in voluntary concessional (before-tax) and non-concessional (after-tax) contributions into their super fund to save for a first home.
When the time comes to make a purchase, you request that the ATO deduct the extra contributions you made and any deemed gains you made on those funds (based on the shortfall interest charge).
The first $27,500 that is deposited into the account each year is taxed at just 2015% and not at your regular marginal tax rate. This threshold is reached by adding up all mandatory and voluntary contributions made by the employer.
You will likely save less than $15,000 annually because some tax is still withheld, but you will likely still save more than if the money went into your bank account and was taxed at your marginal rate. However, this will depend on your specific situation.
Under the FHSS program, first-time homebuyers can begin saving by either voluntarily making personal super contributions (after tax contributions) or by entering into a salary sacrifice agreement with their employer (before tax contributions).
They must apply to the ATO for an FHSS determination and a release when you are prepared to release your FHSS amounts.
See our comprehensive guide to the First Home Super Saver program for additional details.
Episode 5: Can I use my super to buy a house?
FAQ
Can I use super to buy property in Australia?
Can I use my super to buy a business Australia?
Is super better than an investment property?
Can I withdraw my super to pay debt?
Can I use Super to buy investment property?
Using super to buy investment property is possible but it’s not for everyone. You’ll need the financial and legal skills and time to set up and run a self-managed super fund. Another option is to invest in property assets through your Australian Retirement Trust account. SMSFs come with many rules and regulations.
Can I Use my Super to buy a rental property?
Yes, you can use your super to purchase a rental property. However, the property must be an investment property, not one that you plan to live in. Furthermore, the property must meet the ‘sole purpose test’ of solely providing retirement benefits to fund members. What are the risks associated with using my super to buy property?
Should I buy property using my self-managed super fund?
Important rules to understand before considering buying property using your self-managed super fund. If you’re considering buying property using your self-managed super fund (SMSF) it’s important you understand the rules relating to SMSFs and property.
Can I use Super to buy a house?
Yes, there are ways you can use super to buy a house – however it’s not as easy as you may think. You can’t simply withdraw the super you’ve saved over the years to buy your first home (unless you’re a retiree and have reached preservation age – the age at which you are allowed to start withdrawing super).