Can I Use My Super to Buy a House to Live In?

Considering how much harder it is becoming to enter the property market, many people are asking the question, "can I use my superannuation to buy a house to live in?"

The answer to this question depends on some specific rules for accessing super, and to help clear things up, Urban.com.au has updated this resource in 2020 with a complete guide for self-managed super fund (SMSF) property rules, ATO conditions and everything else you need to know. 

Can I buy a property from my SMSF?

In order to use your superannuation for property purchases, there are some conditions that need to be met, such as a full superannuation condition of release. The obvious one is retirement, or reaching the age of 65. Officially, retirement is the reaching of preservation age with no intention of working again or an ending employment condition after the age of 60.

If either of these things has happened, you have unrestricted access to your superannuation which you can withdraw to buy a house. However, it is vital to keep in mind any potential tax implications of withdrawing from your super.

For those who do not find themselves in either of the above situations, it is possible in some cases to use your super for investment purposes via a particular arrangement which states you will not be able to live in the property. Many people look into these methods, as well as others that will allow you to purchase property without a deposit, in order to get their foot in the property market door.

What if you want to use your super to buy an investment property?

There are usually specific investment menus in corporate, retail, and industry superannuation funds that dictate the investments of the accounts. These are often a combination of managed funds, ASX-listed shares, and multi-mix investment options, and they will not provide enough scope to buy an investment property.

For this reason, you will need a self-managed superannuation fund which makes you a member of the super fund, as well as the trustee of the super fund. So why doesn't everyone do this? Running a SMSF is a lot of work as you are legally required to meet a range of obligations including regulatory, accounting, legislative, and administrative requirements which relate to being a trustee. There is also a cost associated with a SMSF which is more expensive than a standard fund.

Because of the difficulty that can be involved, SMSF trustees often hire professional accountants or financial advisers to ensure they are compliant, which also incurs further costs. The rules around an investment property that is purchased within a SMSF basically state that ownership must benefit the members of the fund based on the SMSF Investment Strategy and the property must under no circumstances be used for personal purposes for any length of time, no matter how short. Also, the rental income generated by the property, or expenses due, must be paid in and from the SMSF's bank account.

Super and first homes

The above condition means that buying your first home with your super is a no-go unless you happen to be purchasing your first home after retirement age (not that unlikely considering property prices in 2019). That being said, there is a First Home Super Saver Scheme which can assist you in saving a deposit for your first home.

The First Home Super Saver Scheme (FHSS) lets you save money for your first home with your superannuation account via voluntary concessional (pre-tax) or non-concessional (post-tax) contributions. This can be done with salary sacrifice, or personal concessional contributions if you are self-employed. Anyone can make personal non-concessional contributions into their super at any point.

These voluntary contributions and whatever extra funds they may generate can be used as a deposit for the purchase of your first home. However, there are some conditions to consider when it comes to tax:

• The amount that you can access is capped at $15,000 for voluntary contributions from the one year 

• There is a further cap of $30,000, plus earnings in total

• You are only allowed to apply for this scheme once 

• You must live in the home you are buying for six of the initial 12 months of ownership

Anyone who has previously owned a property in Australia, despite applying for the FHSS scheme or not, in ineligible for this scheme and you must be over the age of 18.

There are some advantages to using the First Home Super Saver scheme as any earnings generated by your voluntary super contributions have a cap on their taxes of 15%, likely lower than your individual tax rate. On top of this, salary sacrifice and personal concessional contributions are considered as pre-tax dollars, which may mean you will pay less tax. The idea behind the scheme is that it helps people save their first home deposit sooner, just keep in mind that if you change your mind about purchasing a property, these voluntary contributions will need to remain in your superannuation as you cannot pull them out for any other reason.

Using your super to invest in a commercial property

Many people use their SMSF to buy commercial property or 'Business Real Property.' This can be done with related parties; however, the arm's length basis of SMSF property management still applies.

This is a very popular option for small business owners who may use their fund to purchase a business premises and pay their own rent back to the SMSF. This essentially saves them having to pay rent to someone else and is somewhat of a loophole around the personal use of a super fun investment property. There are, however, there are some conditions to consider if you are thinking about doing this:

1. The market rate must apply to the rent paid 

2. You are not allowed to give yourself any discounts

3. Rent must always be paid in full at each due date

4. The investment must provide retirement benefits for members of the fund

This last point is crucial as this strategy can very easily only offer benefit for the time that you own your business, but that isn't the point of super, it needs to yield a benefit once you retire. To satisfy this component, you will need to ensure that the property you are using your SMSF to purchase has an expected growth in property value. 

Borrowing with your SMSF

You may be able to achieve a limited recourse borrowing arrangement (LRBA) which will allow you to borrow funds, via your SMSF to invest in property. This involves a separate property trust and trustee being established, which will hold the property outside the actual SMSF structure. Income, expenses, and loan repayments will still go via the super fund as per usual.

It is important to note, however, that the borrowing criteria in this instance is much stricter than usual, and incurs higher costs that may lessen the eligibility of the investment. You'll also need to find a financial institution that is willing to lend to an SMSF, which most won't for balances under $200,000.

Using superannuation to purchase property

As you can see above, using your superannuation to purchase a property is not easy, and there are many conditions that will make it unattainable for most people.

That being said, if you manage to fit one of the situations in which this would be suitable, you could be looking at a very worthwhile investment strategy to not only increase your property portfolio but also plan for a comfortable retirement. Ensure that any investment you are making is worthwhile, stick within a reasonable budget for yourself, and follow the rules to the letter, and this may be a very lucrative investment and superannuation strategy for you.