Is It Worth Buying Property With Your Super in Australia?

April 17, 2024
is it worth buying property with super

Key takeaways:

  • Using superannuation to invest in property can provide an opportunity to enter the market sooner and grow your retirement nest egg through the potential increase in property value and rental income.
  • Consideration must be given to the trade-offs, including reduced flexibility and possible impact on retirement savings due to early super withdrawal and investment risks.
  • It’s essential to seek professional financial advice to navigate the complex rules surrounding SMSF property investments and ensure compliance with legal requirements and financial viability.
  • Understanding the costs involved, including establishment fees, annual audits, borrowing costs, and maintenance expenses, is crucial for assessing the overall benefit of investing in property through your SMSF.

Keen to get a foot on the property ladder but lacking the funds for a deposit? You’re not alone – and using super to buy a house could be the answer many Aussies are seeking.

So, we know you can use your super to buy a house, but is dipping into your super to purchase an investment property or future home a wise move?

It’s a burning question for plenty of aspiring homeowners, particularly younger generations watching prices soar while their hard-earned retirement nest eggs sit plumping up.

Let’s take a look at the key pros and cons of using your super to buy property in Australia:

3 Advantages of Using Super to Buy Property

Growth Trajectory of Property Prices vs Wages Over 20 Years

Source: Highcharts

#1: Get Into the Market Sooner

Property price growth has far outpaced wage rises in recent decades (see graph above). Accessing your super allows you to get a foot on the ladder earlier by boosting your deposit savings.

Australian residential property prices have risen 120% in the last 20 years while wages grew just 75%.

#2: Grow Your Retirement Nest Egg

An investment property purchased through your super has the potential to increase substantially in value over time and generate rental income. This growth is all protected within your tax-advantaged superannuation environment.

#3: Tax Benefits

All rental profits, property price gains and depreciation benefits on an investment property owned within super are concessionally taxed at just 15% (or up to 47% less than outside super).

3 Potential Disadvantages of Using Super to Buy Property

#1: Less Retirement Savings

Tapping into your super today means forgoing years of compounding interest and employer contributions, leaving you with less for retirement itself. Careful analysis is needed to ensure the trade-off is worthwhile.

#2: Lack of Flexibility

An investment property purchased through superannuation is far less flexible than buying a home in your personal name. Strict superannuation laws govern when you can access the capital and rental income from the property.

[As outlined in the SIS Act, benefits in an SMSF cannot be accessed until reaching preservation age, typically 60.]

#3: Borrowing Requirements

To buy an investment property with your super fund, you must use a specific borrowing arrangement called a limited recourse borrowing arrangement (LRBA).

This involves creating a separate property trustee to handle the purchase and operate under very restrictive rules. [LRBAs are a legal requirement for any direct property purchase by an SMSF, according to ATO regulations.]

So, Should You Use Your Super to Buy Property?

As with any major financial decision, there are advantages and drawbacks to weigh up carefully.

Purchasing an investment property through your self-managed super fund (SMSF) could be a great way to get into the market sooner and turbocharge your retirement nest egg through tax-effective property investment.

However, the complicated rules, borrowing requirements and loss of liquidity mean it’s not the right strategy for everyone. A thorough analysis of your current super balance, future contributions, investment timeframes and overall financial situation is critical before proceeding.

Getting Professional Property Investment Advice

The decision to use your superannuation to invest in property should never be taken lightly. Property is a long-term, illiquid investment – so getting professional financial advice tailored to your circumstances is essential.

ASIC strongly recommends seeking advice from a qualified professional before undertaking any SMSF property investments.

An experienced financial adviser can model different investment property scenarios within your SMSF to determine if it is viable and tax-effective for your specific situation.

They can also ensure you understand and comply with all the legal requirements around SMSFs, borrowing, and purchasing investment properties.

What Types of Properties Can You Purchase?

One key factor your financial adviser will analyse is what types of investment properties are permissible to purchase through an SMSF.

In general, you can invest in:

  • Residential properties for investment purposes only (not to live in)
  • Commercial properties like offices, industrial sites or retail premises
  • Vacant land to be developed for residential or commercial investment

The ATO outlines these property types as being appropriate for SMSF investment, provided they meet the Sole Purpose Test of providing retirement benefits.

However, there are restrictions on purchasing properties from disqualified persons like SMSF members or relatives. Your SMSF also cannot purchase properties that provide rental income from SMSF members or related parties. These are clear contraventions of SMSF regulations according to the ATO.

How Much Super Can You Use to Invest in Property?

The amount of money you can release from your superannuation fund to purchase an investment property depends on a few key factors:

  • Your Total Super Balance: Current rules allow SMSFs to have a maximum of $1.7 million in total assets per member before facing penalty taxes. This is the Transfer Balance Cap set by the ATO.
  • Existing Super Holdings: Those with very large super balances may already be brushing up against that $1.7 million limit, restricting their ability to withdraw substantial funds.
  • Preservation Age: Generally, you cannot access any preserved super benefits until reaching your preservation age (between 55-60 depending on your birthdate).
  • Tax Components: Lump sums taken from the tax-free component of your super won’t be taxed, while amounts from the taxable component will face tax rates of between 17-22%. Tax rates confirmed by the ATO.

For more details on the deposit you need to buy a house, this comprehensive guide covers everything you need to know.

Setting Up Your SMSF for Property Investment

If going down the property investment path seems appropriate, your adviser will guide you through the regulatory requirements for purchasing real estate through your SMSF. This starts with establishing an SMSF trust and corporate trustee structure if you don’t already have this set up.

Your SMSF will then need to be audited annually by an approved professional. You’ll need to demonstrate you have an investment strategy that allows for direct property investment, and that you retain sufficient liquidity for income streams, tax payments and fund expenses. All requirements stipulated under th/e SIS Act.

Getting an LRBA in Place

To comply with borrowing rules, your SMSF will establish what’s called a Limited Recourse Borrowing Arrangement (LRBA) through a property trustee. This legally separates the purchase from your SMSF’s existing assets, quarantining the debt to that specific property alone.

Setting up this structure correctly in line with ATO requirements is essential for maintaining SMSF compliance. Your financial adviser and property accountant can walk you through the necessary steps.

Weighing Up the Costs

While investing in property through your SMSF can deliver great tax benefits over the long run, it’s important to be aware of the up-front and ongoing costs involved:

  • Establishment fees for setting up the SMSF and LRBA structure
  • Annual auditing and admin fees
  • Borrowing/interest costs if using a property loan
  • Stamp duty, legal fees and purchase costs for the property
  • Ongoing property management, maintenance and council rates

According to research by Australian Super, the total costs for an SMSF with a property investment can exceed $40,000 over 5 years for smaller balances.

For younger investors with smaller super balances, these costs can eat substantially into short-term returns. Again, getting tailored advice is crucial to understand the true viability.

For those considering how to buy a house with no money, exploring the option of using super for property investment might be a viable pathway, despite the associated costs and complexities.

FAQs on ‘Is It Worth Buying Property With Your Super in Australia?’

Can I use my super to buy an investment property in Australia?

Yes, you can use your super to purchase an investment property in Australia. However, the process involves strict regulations and isn’t straightforward, making it unsuitable for everyone.

Is superannuation a good investment in Australia?

Superannuation in Australia is considered a favourable investment due to its lower tax rates on earnings compared to other investment options. Additional savings can be made through concessional or salary sacrificed contributions.

What are the disadvantages of superannuation?

One key drawback of superannuation funds is the lack of investment diversification if this is your only investment approach. They may also be less tax-efficient for individuals with a marginal tax rate below 33%, and there are additional costs compared to direct investments.

Is property investment a good idea in Australia?

Property investment can lead to financial freedom for many Australians if done correctly. Success in property investment requires choosing the right property in the right location, emphasizing strategic selection over mere acquisition.

Soho is your expert team in Australian real estate, offering an innovative platform for effortless property searches. With deep insights into buying, renting, and market trends, we guide you to make informed decisions, whether it's your first home or exploring new suburbs.
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