Can I use my super to buy an investment property

Want to know if you can use your superannuation to buy an investment property? Well, the short answer is yes. However, you can only do so through a self-managed super fund (SMSF) and under strict conditions set by the Australian Taxation Office (ATO).

Currently, over 1.11 million Aussies run an SMSF^[1], and collectively, they are worth an estimated $914 billion^[2] in local and overseas assets. However, only $49 billion has been acquired in residential bricks-and-mortar^[3], while commercial property assets add up to $90 billion ^[4].

So, while it's possible to invest in property using your retirement savings, in reality, very few people do.

What are the rules for buying investment property with super?

While the majority of Aussies who run SMSFs are choosing not to buy a residential or commercial investment property with their super, if this is something you are interested in doing, there are four specific rules your property investing must comply with.

1. It should satisfy the 'sole purpose test', which requires it to provide retirement benefits solely to fund members.
2. It cannot be procured by someone who is related to you.
3. Fund members or persons related to them are not permitted to live in it.
4. It cannot be rented by a fund member or anyone related to them.

How does buying property with super work?

If the property you want to buy with your super satisfies these four criteria, there are three ways you can complete a purchase.

You can either do it through a Self-Managed Superannuation Fund (SMSF), the First Home Super Saver (FHSS) Scheme, or by purchasing a home after reaching your preservation age (the minimum age you can access your super).

As mentioned, you can buy an investment property through your SMSF as long as it meets strict ATO rules.

Alternatively, the First Home Super Saver (FHSS) Scheme allows buyers to withdraw voluntary super contributions for a house deposit, but only if they are purchasing their first home.

The third option is to wait until you reach your preservation age, at which point you can access your superannuation and buy a home to live in.

Each method has different benefits, risks, and tax implications. So, it is worth seeking professional advice, warnings, and suggestions from an accountant to understand them better.

How to use super for investing in property

Above, we’ve briefly mentioned the different ways you can use your super to buy an investment property. However, in this section, we will provide more detailed information.

1. Buying with an SMSF

SMSF is a private superannuation self-managed fund that gives individuals more control over their retirement savings.

Unlike retail or industry super funds, SMSF trustees make all investment decisions. However, they also bear the legal responsibilities for compliance.

Managing an SMSF can be complex and costly and requires you to strictly adhere to ATO rules and regulations.

Key Rules and Restrictions

As discussed, to be eligible to buy an investment property with your SMSF, you need to ensure the following:

• You pass the sole purpose test
• You, your family, or related parties cannot live in or rent the property.
• The purchase price and rent must be at market value.
• Your borrowing to buy a property must be structured correctly through a Limited Recourse Borrowing Arrangement (LRBA).

According to Brett Kretchmer, Director and Financial Advisor at Finsura Wealth Management utilising a Self Managed Superannuation fund (SMSF) structure is an effective strategy to build your retirement savings. This superannuation structure has increased in use and size rapidly over the years. An SMSF provides the following benefits:

• Additional control over your superannuation investment assets and decisions relating to these. Setting your own investment strategy and choosing your underlying investments are examples of this
• Increase in investment choices. An SMSF allows investment assets that may not be available in retail or public superannuation offerings such as your business premises if you run a small business, artworks, vintage cars and residential investment properties
• Increase in flexibility regarding strategic decisions and pooling assets with up to 6 members

“However Self Managed Superannuation Funds are complex and involve compliance risks if you do not obtain the appropriate advice and work closely with professionals. With a sufficient super balance, desire to invest in assets an SMSF only allows and utilising professionals to assist in running your superannuation fund, a self managed superannuation fund can be a very effective structure to build your retirement savings.” Brett Kretchmer, Director at Finsura Wealth Management.

Setting Up an SMSF

If you want to purchase an investment property through an SMSF, there are a few things you will have to do to set it up. They include:

1. Establish and register the SMSF with the ATO.

2. Create an investment strategy that incorporates property.

3. Open a separate bank account for the SMSF.

4. Make sure you are compliant with SMSF regulations.

Limited Recourse Borrowing Arrangements (LRBAs)

An LRBA is an initiative that enables an SMSF trustee to take out a loan from a third-party lender. The trustee can then use those funds to purchase a single asset (or multiple identical assets of the same market value), which is to be held in a separate trust.

Again, there are some restrictions. For instance, the property cannot be significantly renovated using borrowed funds, and the borrowing must only be for that acquirable asset.

The costs can also be more expensive than when purchasing regular property as the fees for the following may be higher:

• Loan establishment
• Legal fees
• Financial advice fees
• Compliance with ATO fees

In addition, there are several risks associated with buying property with an SMSF, such as:

• Market fluctuations, and in particular, declining property values, might impact retirement savings.
• Cash Flow Challenges like loan repayments being met without relying on personal funds.
• Non-compliance with SMSF rules can result in penalties.
• Property is an illiquid asset, which means it is harder to sell quickly if you need to do that.

2. Buying with the FHSS scheme

The First Home Super Saver (FHSS) Scheme helps first-home buyers save for a deposit using voluntary super contributions (as opposed to employer contributions).

Eligible first-home buyers can withdraw up to $50,000 of voluntary contributions for a property deposit, although no more than $15,000 per year ^[5].

However, the property must be lived in for at least six months within the first year of ownership before it can be used as an investment.

To be eligible, you must:

• Be a first-home buyer.
• Intend to live in the property (initially at least).

3. Buying a house once reaching the preservation age

Once you reach your preservation age, you can access your super and use it for any purpose, including buying property.

If you were born before 1^st July 1960, your preservation age is 55. If you were after 1^st July 1964, your preservation age is 60.^[6] Alternatively, you can access it at age 65, even if you are still working.

While it is less commonly used for investment purposes, it does allow retirees to purchase a property outright or use their super for a deposit on an investment.

However, funds withdrawn from super are subject to tax depending on the withdrawal method. At the same time, investment properties purchased through super you have accessed may impact your eligibility for the age pension.

What are the costs involved?

The total costs involved in buying an investment property through your superannuation depend on the purchase method you choose.

For instance, when using an SMSF, there are setup fees, legal fees, and ongoing compliance costs you will have to factor in, along with costs for professional investment advice, such as that from an accountant.

Congruently, stamp duty applies to all property purchases, while loan costs will also come into the reckoning if you are borrowing through an LRBA.

Some other costs that might accrue include:

• Property management fees if you are hiring a professional to manage the investment.
• Strata fees
• Various insurances to protect your assets.
• Legal Fees, which are necessary for property transfers and SMSF structuring.

Each of the three methods carries different financial commitments, so it is good practice to fully understand what they are before proceeding with a purchase.

Pros and cons of buying investment property with super

Like with most things, there are pros and cons to using your super to buy property. Here are some of the main positives and negatives of doing so.

Pros

• You can invest in property even if you are not yet able to access your superannuation or don’t have enough cash saved up for a deposit.
• Should you need to secure a loan to purchase a property, interest payments may be tax-deductible.
• Other possible tax benefits include a capital gains tax discount (once you have owned the property for a minimum of 12 months).

Cons

• The process is quite complex and can take up a lot of your time, and if you make mistakes, you might face hefty fiscal penalties.
• Using a significant portion of your super to purchase the property is risky because if its value falls, it could impact your savings.
• It can cost you more money to secure an investment property via an SMSF, particularly if an LRBA is involved.

What are some additional things to consider before buying?

Before you go ahead and use your super to buy an investment property, there are a few other things you may want to consider.

One of the main ones is how important it is to you to have a diverse portfolio of assets because relying too heavily on property can expose you to market risks, cash flow challenges, and limited liquidity. All these factors may impact the wealth you generate for your retirement savings.

It is also worth seeking professional recommendations before making any investment decisions. For instance, financial advisers can help assess whether property investment is the right fit for your retirement goals. At the same time, accountants can provide guidance on tax and compliance, and lawyers can advise on the property settlement and legal processes.

These professionals are professionals for a reason. So, it is worth engaging their services to better understand the risks and benefits of using your super to purchase an investment property.

Summing up

The decision to purchase property with your superannuation is something you’ll have to come up with yourself. However, just because many people are not doing it may not be the best reason why you choose not to do it as well.

Instead, whatever decision you make, it is worth weighing up the pros and cons of doing so after seeking professional advice.

If you decide you do want to purchase a property, then that is where we can help. Our expert team of residential estate agents know the local market like the back of their hands.

Contact them today to kickstart your search.

Frequently asked questions

Here are some answers to questions we are regularly asked about the purchase of commercial or residential property through a superannuation fund.

Can I use my SMSF to buy a residential property for personal use?

Unfortunately, no. SMSF property investment must comply with the Sole Purpose Test, which means the property cannot be used by you, your family, or related parties.

Instead, the property must be solely for generating retirement benefits.

How does the property market affect SMSF property investment?

Market conditions can impact property value and rental income, which can influence the performance of SMSFs and property investments.

For this reason, it is advisable for trustees to thoroughly assess risk tolerance and consider diversification before committing to any purchases.

Should I seek professional advice before using my super to buy an investment property?

It is always a good idea to engage a financial planner, SMSF accountant, or private wealth advisor before using your SMSF to buy an investment property.

They will help you to ensure your investment strategies are suitable for your objectives financial goals and comply with regulations.