25 March 2022

Using Super to Buy a Property

Emma McLaren
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uper has long been a way to save money for retirement, however in recent years, the ability to use your super to buy property has become more popular. While it isn’t a simple process, using the First Home Super Saver (FHSS) scheme or utilising a self managed super fund (SMSF) has made the possibility of using your super to buy property easier to achieve.

There are two ways you can purchase property through your super, and they both have different intentions. For those looking to purchase their first home to live in, you can utilise the FHSS scheme, however there are limitations on what you can purchase and how long you have to purchase.

For investors, you can set up a SMSF. Unlike putting money into your current super account, when you open a SMSF, you can decide where your money is invested, and that can include investment properties. You however, cannot live in the property.

Let’s take a look at both options.

Using the First Home Super Saver Scheme

The FHSS scheme started in 2017, allowing first home buyers to save for a deposit within their super account. It is certainly a great way to be able to save for a deposit away from a general bank account. Because of the concessional tax treatment, first home buyers could save for a deposit faster.

How does that work? By making additional voluntary concessional (before tax) and non-concessional (after tax) contributions to super, the contributions are taxed at a lower rate which means more money goes towards the deposit. Up to $15,000 can be contributed per financial year, and as of July 2022, up to $50,000 can be contributed towards the FHSS.

Additional contributions are taxed at 15% and not at the usual marginal rate, for the first $25,000. This is across both compulsory contributions from the employer and voluntary contributions.

When ready, you can withdraw the funds you’ve contributed to put towards your deposit for your first home. To release the FHSS, you need to apply for the ATO for a FHSS determination and release.

Eligibility for the FHSS Scheme

There are a few eligibility requirements under the FHSS scheme, which is assessed on an individual basis. This means that both you and your partner, sibling or friend can access your own contributions to purchase the same property.

To be eligible to access the funds, you must use the funds within 12 months, live in the property you are buying or intend to do so as soon as practicable, and intend to live in the property for at least six months within the first year of ownership.

Benefits of the FHSS Scheme

There are a number of benefits to the scheme, and for first home buyers it can really make a lot of sense to save your deposit this way. Benefits include:

  • Boosting your savings as you will be saving the difference between your marginal tax rate and the 15% charged on super contributions.

  • Making concessional contributions through salary sacrificing can lower your taxable income.

  • The scheme isn’t affected by falling markets.

  • As a couple, you can get double the benefit.

The only real downside to utilising the FHSS to buy your first home is that the cash is tied up, so you can’t access it for other reasons.

Purchasing a Property using a Self Managed Super Fund

We now step into the domain that savvy investors have been in for a long time - purchasing an investment property through your super by utilising a self managed super fund (SMSF). You can purchase a house using your super, but the catch is that you can’t live in it. Property plays a role in many people’s investment strategies, and this way just allows you to do it with your super funds rather than through disposable income.

The benefit of a SMSF, which can have between one and four members, is that you can make your own decisions about how and where your super is invested, whether it be in property, shares, art, or anywhere else.

While this all sounds great, setting up a SMSF is highly regulated and does require annual audits, which may push the cost out of reach for many people. It is important to get professional financial advice to ensure your fund is set up correctly, and that you understand your responsibilities.

Using Your SMSF as a Deposit

Due to the regulations on a SMSF, you can’t use all your super to buy an investment property - there needs to be a buffer left in your account. Traditionally banks are very careful when it comes to lending through a SMSF, and provide a lower loan-to-value ratio. They tend to only lend up to 70% of the value, and there is no LMI to increase that.

One of the regulations on a SMSF is that there is a requirement for a liquidity buffer which needs to be made up of things like cash and shares. This has to be 10% of the proposed investment value in the fund.

Arm’s Length Rules

When it comes to a self managed super fund, you may have heard about the arm’s length rules. In general, a SMSF cannot buy assets from or lend money to a member of the fund or their related parties. There are some exceptions but there are other rules as well.

The area that tends to trip people up is the definition of related parties, because it isn’t just a relative. Related parties, in terms of a SMSF, refers to:

  • Relatives of each member

  • Business partners of each member and their spouse or child

  • Any company that the member or their associated control or influence

  • Any trust that the member or associates control

An interesting point to remember is that employers who contribute to a member’s superannuation are considered related parties.

As you can see, the regulations around a self managed super fund are varied and easy to trip on. Ensuring you get proper financial advice is essential prior to using your super to purchase a property.

With property prices increasing, both these methods can be a great way to get a foot onto the ladder. Make sure you get the right information and advice, and assess whether this is the most beneficial way for you to get into your own home.

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