The ins and outs of buying property with your superannuation

Property ownership is the great Australian obsession. In fact, our superannuation system depends on it. The ASFA retirement standard for comfortable and modest retirement income levels assumes you own your own home outright.

That’s somewhat concerning when you consider home ownership (with or without a mortgage) has been declining and renting is on the increase.

Back in the mid-1990s, 42.8% of households owned a property without a mortgage, compared to 29.5% in 2019-20, while those renting from private landlords have jumped from 19% to 26.2% in the same period (Source: Australian Institute of Health and Welfare).

Building the funds for a deposit is a significant barrier for most aspiring buyers – but could you dip into that other significant asset, your superannuation, to buy?

The short answer is yes – with constraints. Whether or not you should is a completely different question and is best answered by a qualified expert. But for those wanting the basics, here follows a simple explanation of the options. (Please make sure you seek out advice and double-check any changes in legislation if you decide to use your superannuation to buy property).

The options for buying directly

First home super saver scheme

If you want to buy your first home and have never owned any form of property in Australia before, you can use your super to save extra for a deposit and withdraw it.

This involved making voluntary contributions to your superannuation of up to $15,000 per year (to a max of $50,000 over multiple years). Be aware there are limits on how much you can contribute to your super in general though.

You can contribute up to $30,000 per financial year from your pre-tax salary (this includes your Superannuation Guarantee paid by your employer) and this is taxed at 15% compared to your applicable marginal tax rate. An additional 15% tax may apply to higher-income earners. This is known as a concessional contribution. You can contribute up to $120,000 per financial year from your after-tax income, known as a non-concessional contribution.

You are then able to withdraw that value – plus associated earnings – through the ATO to use as a deposit on a first home. You need to meet a condition of release to do so. Assessable first home saver scheme amounts also benefit from a 30% FHSS tax offset. You can find full details here.

The advantage of using your superannuation to save your deposit is that your savings may benefit from being in an investment environment – and if you can contribute pre-tax, then you may benefit from more favourable tax applying to your savings.

The disadvantage of this scheme is that withdrawing money from your superannuation does have an impact on the long-term value you’ll have at retirement – you won’t enjoy compounded returns overtime on the value you withdraw. There are also strict requirements in terms of how you can use your deposit. For instance, you need to live in the property for at least six months during the first year of ownership.

Retirees drawing down assets

Retirees do have the option to draw down their superannuation to use for purchases like property, be it to live in or as an investment.

There are a range of additional considerations they may have, such as how a drawdown might affect the income they then have to live on, or whether a property investment is the best option for their funds compared to other investments.

The options for buying indirectly

If you don’t meet the criteria of being a first home buyer or a retiree able to withdraw for property, another option might be buying a property within your superannuation – but you’ll need a self-managed-super fund (SMSF) as it's unlikely a retail fund will allow you to buy a property.

This is a much more complicated option for buying property and comes with restrictions. Without getting into the legal requirements binding appointed trustees for SMSFs, any property your SMSF buys must:

• Solely provide retirement benefits to the SMSF member(s)
• Not be purchased from a related party of a member
• You can’t live in it, nor can anyone related to you
• You can’t rent it yourself or rent it out to anyone related to you.

In addition, you can’t use the property as your holiday home or as an Airbnb rental - Airbnb doesn't match the legal arrangements you need to set in place to rent out the property and stay at arm's length.

That said, if you purchase a commercial premise, such as a shop or warehouse, you (or someone related to you) can lease it from your fund – but it must be done at market rates and purely for business purposes.

Your SMSF needs to be able to cover ongoing costs around the property, such as legal fees, property management fees or loan costs (if the fund is required to take out a loan to purchase).

You can read more on the rules at the ATO website.

If you eventually did want to live in the property, you’d need to try and purchase it from the SMSF (if pre-retirement) or if post-retirement, have the SMSF transfer it to you as an in-specie benefit – there would be tax applicable as it counts as a lump sum being withdrawn.

In short, it’s a complicated approach and you may be better off simply trying to save to buy outside of super or using other property exposures such as REITs, ETFs, or direct shares in developers or the like within your SMSF.

Final things to consider

Investing can be a helpful way of building a deposit for property – but superannuation is far from the only option. Speaking to a financial adviser can help with budgeting, comparing options from high-interest savings accounts to ETFs and share portfolios, to superannuation to find the most appropriate option for you.

In the case of using your SMSF to indirectly buy a property, don't forget that you are taking on the responsibilities and costs of a landlord with the addition of specific legal requirements to the SMSF structure.

Have you used your superannuation to purchase a property? What tips do you have for others considering this approach?