How to use Super to buy a house with the FHSSS or a SMSF
While it might not be as simple as withdrawing super and buying a home, by using a self-managed super fund (SMSF) or tapping into the federal government’s First Home Super Saver (FHSS) scheme, it’s possible to buy a house, thanks to the tax benefits on offer.
Australians who set up a SMSF can decide where their super is invested and that can include investment properties, but not a place to live. And through the FHSS scheme, first-time buyers can save for a deposit, via voluntary contributions, inside their superannuation account. An increasing number of people are taking control of their own superannuation and where it should be invested.
1. Use a self-managed super fund (SMSF) to buy an investment property
Under the rules of a SMSF, Australians can use their superannuation to buy an investment property, but not one they plan to live in.
The property can be purchased through the SMSF; a fund that can have between one and four members. The members make their own collective decisions about how their superannuation is invested.
This could still mean investing in property so, many people instead include houses as part of their investment strategy and retirement plans.
Setting up a SMSF is a highly regulated process, and it’s smart to get professional financial advice to understand the responsibilities and set up the fund correctly.
Use SMSF as a deposit
If you had a $300,000 balance in your super, you can use $200,000 of that money as a deposit and borrow another $400,000 to buy a $600,000 apartment. Restrictions on borrowing through a SMSF, however are quite strict. It’s not possible to use the full super balance to buy an investment property. SMSFs are also required to keep a “liquidity buffer” – made up of things like cash and shares – that is worth 10% of the proposed investment’s value in the self-managed fund.
Then in terms of finance, banks will only lend up to 70% of the house value, and won’t allow lenders’ mortgage insurance to increase that amount. Borrowing money to buy property is often done through a Limited Recourse Borrowing Arrangement (LRBA), which involves the SMSF trustees receiving the beneficial interest in the purchased asset, while the legal ownership is held in trust.
SMSF property and arm’s length rules
Any investment – such as buying property – through a SMSF must be done on an “arm’s length” basis.
Generally speaking, that means SMSFs can’t buy assets from, or lend money to, fund members or other related parties, although there are some exceptions to this rule. There are other rules too.
The definition of “related parties” often trips up SMSF trustees because a related party is not defined merely as a relative or another member of a SMSF. It also includes:
- the relatives of each member
- the business partners of each member
- any spouse or child of those business partners
- any company that the member or their associates control or influence
- any trust that the member or their associates control.
It’s also important to note that employers who contribute to a member’s superannuation are considered related parties too.
For further information on the rules and regulations surrounding SMSFs and property see the ATO’s website.
2. Use the First Home Super Saver (FHSS) scheme to buy a house
The FHSS scheme lets would-be first-home buyers save for a deposit inside their superannuation account.
Rather than use existing super to buy a property – the FHSS scheme helps Aussies save for a deposit faster, because of the concessional tax treatment of superannuation. Those on the scheme can make voluntary concessional (before-tax) and non-concessional (after-tax) contributions into their super fund to save for a first home of up to $15,000 per financial year. They can then apply to release those contributions and any associated earnings for a deposit. The dollar value of contributions that can be released is currently capped at $30,000, but from 1 July 2022, that amount will be increased to $50,000.