Did you know that it’s possible to use your super to buy property?
There are two ways to do it.
1) Through a self-managed super fund (SMSF).
2) Through the First Home Super Savers Scheme.
In this article, we’ll explain how to buy property via both of these methods, including the important rules you need to follow to ensure compliance with superannuation legislation.
Purchasing through a SMSF
An increasing number of Australians are taking control of their superannuation investments via their own self-managed super fund.
This allows them to decide which assets they want to invest in to secure their financial future. Investment properties are an attractive option because they can potentially provide the SMSF with both capital growth and rental income.
Residential or commercial properties in good locations in Australia have a strong track record of delivering healthy long-term investment returns.
However, there are some strict rules that you need to follow, both to set up a SMSF and to buy property through this investment vehicle.
The rules
Firstly, to set up a SMSF, you need to seek independent professional advice to determine if it’s an appropriate investment strategy for your individual circumstances.
If you already have your own SMSF, you need to satisfy four criteria to buy property:
1) The purchase must pass the ‘sole purpose test’. In other words, the property needs to have been purchased with the sole intention of providing retirement benefits to your SMSF members. An SMSF can have between one and four members.
2) The property must not be bought from a related party of any of the SMSF members.
3) None of the SMSF members or their relatives can live in the property.
4) The property can’t be rented by any of the SMSF members or their relatives.
In addition, using super to buy property must be done under very strict conditions known as a ‘limited borrowing recourse arrangement’ (LBRA). An LRBA requires the SMSF’s trustee to take out a loan from a third-party lender. These LRBA funds can then be used to buy property. The property is held in a separate trust and the investment returns go to the SMSF trustee.
The First Home Super Saver Scheme
The First Home Super Saver Scheme (FHSSS) was announced in the 2017/2018 federal budget and came into effect on 1 July 2017.
The aim of the scheme is to allow first home buyers to use the lower tax environment in superannuation funds to help them save for a house deposit. It is designed to make housing more affordable.
The way the FHSSS works is that any Australian citizen over the age of 18 who has never owned property can make extra voluntary before-tax contributions to their super funds.
These pre-tax contributions are taxed at just 15%, which is less than the marginal tax rate that any worker earning over the tax-free threshold of $18,000 must pay.
Contributors to the Scheme therefore pay less tax and they can then withdraw these extra contributions and associated earnings for a deposit when they want to buy their first house, instead of having the funds locked away until their retirement which was the case before the FHSSS was introduced.
The rules
There are four rules that FHSSS participants must abide by:
1) They can contribute up to $15,000 to the FHSSS in any one financial year.
2) They can contribute a maximum of $30,000 into the FHSSS in total.
3) They can only withdraw FHSSS funds once.
4) They must intend to live in the property that they want to buy with their FHSSS funds for at least six of the first twelve months that they own it.
