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What are the rules for buying property with super?
There are two established pathways for purchasing a property with superannuation:
- Using a Self-Managed Super Fund (SMSF) to buy an investment property
- Leveraging the First Home Super Saver (FHSS) scheme to save for a deposit on your first home.
Deciding which strategy to explore (if any) will depend on how you intend to use the property once purchased. If you want to live in the property, you can explore the FHSS. If you are looking to invest in property, then you may choose to do so through an SMSF. Each option has a distinct investment strategy and regulations you must follow.
Buying an investment property with an SMSF
Buying an investment property through an SMSF involves specific rules and considerations. There are several key areas to be aware of when using an SMSF to ensure the arrangement is structured correctly and aligned with your retirement goals.
Rules and restrictions on investing in property with your super
There are many rules for investing in property with your super – the main difference is in the type of property that you can purchase. There are different rules for properties that are residential and those that are commercial.
Purchasing a residential property with super
You will need to purchase this from someone that you aren’t related to or haven’t been a partnership with. This is referred to as an unrelated party. Renting out the residential property also comes with restrictions, so if you’re thinking it’ll be the perfect holiday home, think again. Neither you nor any of your family members can stay in the property, ever. It must be leased to an unrelated party.
Purchasing a commercial property with super
The rules are different when the property is a commercial property and used wholly and exclusively for business purposes. Your SMSF can purchase commercial property from yourself or relatives of the fund. The tenant can also be related to you. Of course, all these transactions must be conducted at market value and on an arm’s length basis, or there can be significant tax consequences.
SMSF borrowing rules and Limited Recourse Borrowing Arrangements (LRBAs)
LRBA’s are a way that you can borrow money within your SMSF to be able to purchase a property. The limited recourse nature of the loan ensures that other assets within the fund remain safe from the bank, should the loan default.
Using an LRBA typically involves the following steps:
- Establish a holding trust that is separate from the SMSF.
- Obtain financing, either via loan or related party.
- Use the holding trust to purchase the property under a bare trust arrangement.
- This trust holds the property for the SMSF, while you repay the loan.
- Once the loan is fully repaid, you can transfer the property to the SMSF.
Things to keep in mind:
There are limited financial institutions o banks that currently offer LRBA loans. Typically, the Loan to Value ratio (LVR) is around 70-80% for residential property and commercial is 60-70%.
Not all property purchases are suitable to be under LRBA. For example, you could not buy a vacant block of land and then develop it, neither could you buy a house to knockdown and rebuild.
Given the complexity and regulations involved, we recommend seeking professional advice before making any arrangements.
What is the minimum balance required in super for property investment?
While there is no minimum set by the ATO, the SMSF will need to have enough to purchase the property and purchasing costs (i.e. stamp duty & legal fees) while still having enough cash reserves to be able to pay the SMSF operating & admin and to cover periods when the property may not be rented out.
Many financial experts recommend at least $250,000 combined balance to start an SMSF.
Even if you are looking to borrow to purchase the property under LRBA, you still need to factor in that the LVR ratios don’t include the purchase costs.
Structuring your SMSF for property investment
Property can be an excellent long-term investment inside an SMSF, but the structure must comply with strict ATO & SIS Act rules. Poor structuring and implementation often cause audit breaches and are costly to fix, if correction is even possible.
If owing the property directly or using an LBRA isn’t possible, there may be other structures to explore.
One popular option for SMSFs that want flexibility without taking on debt is a unit trust. Under this structure, the property must be commercial, the trust cannot borrow, and the property must not be used as security for any other lending.
With a unit trust structure, the property is jointly owned by the SMSF and other parties, allowing for multiple unit holders. While this approach can work well, it is more complex and introduces additional risks that you must consider carefully.
Another option worth exploring is to own the property as tenants in common or in partnership with the SMSF.
Every structure has advantages and disadvantages, and determining which is most suitable will depend on many variables such as funding, your intend to use the property and your long-term objectives.
Common costs and ongoing expenses to budget for
Each year there will be administration costs for audit, preparation of tax returns and compliance.
Property costs must also be paid for with super money. This includes maintenance, rates, insurance and management fees.
LRBA loans have higher interest rates and lender requirements compared to standard property loans, so this also needs to be factored into the ongoing costs.
There are one-off set up costs if the SMSF is not yet established. If there is an LRBA, a bare trust and company to act as corporate trustee will also need to be purchased.
Using the First Home Super Saver (FHSS) scheme to
buy a house in Australia
Distinctions between SMSF investment and FHSS scheme for property
Homes purchased under the FHSS are intended to be lived in as a principal place of residence and is owned by the individuals. There are no restrictions on who can live in the house once you purchase it. Compare to a superfund investment property, which gets used to provide retirement benefits, not personal benefits.
How the FHSS scheme can help you buy your first home
The FHSS Scheme allows first home buyers to save their deposit inside superannuation, then withdraw those contributions (plus associated earnings) when ready to buy a home.
The FHSS allows you to withdraw 100% of eligible non concessional voluntary contributions (contributions made with after tax dollars), 85% of eligible concessional voluntary contributions (deducible or salary sacrificed contributions made in addition to the mandatory employer contributions) plus associated earnings, calculated using an ATO-set deeming rate. There are caps to the amount that can be contributed.
You can release up to $15,000 of total contributions made in a particular year starting on or after 1 July 2017 or $50,000 across all years.
This may be appealing to first-home buyers as their money cannot be withdrawn until they are ready to purchase their first home.
Eligibility for the FHSS scheme in Australia
You must be 18 years or older and never owned a property in Australia and intend to live in the property for at least six months within the first 12 months of ownership. The scheme can be used for an established home or new build including buying vacant land and building in Australia.
Once you’re ready to buy, you must apply to the ATO to release the funds under the FHSS release request which would take 15-20 days. After submitting the request, you have 12 months to sign a contract or build a home. A 12-month extension can be applied for if you haven’t been able to find the right property, but the ATO must be notified within 90 days of signing the contract.
If you are considering pursuing this strategy, we recommend speaking to a financial planner about the best long-term options for your unique circumstances.
Frequently asked questions
Definitely not – residential properties cannot be used by you or your relatives.
Buying property through super can be rewarding, but the risks are often higher than outside an SMSF because you are operating within a tightly regulated environment with limited flexibility and higher financial consequences.
The main risks would be liquidity, borrowing restrictions, cash flow, compliance risk, costs. There also needs to be an exit strategy if the property needs to be sold due costs, marital breakdown or death of a member.
Having a property within a SMSF can have great tax benefits. Earnings are taxed at 15% and capital gains receive a 1/3rd discount after the property has been held for more than 12 months (making an effective tax rate of 10%). This is much less than the personal tax rate of 47%
There is a potential for the earnings and capital gains on sale to be tax free once the members have retired or over 65 and the SMSF is all in pension phase.
While there are tax advantages to having property in super – getting it wrong could lead to unintended consequences and top marginal tax rates on the earnings & capital gain on the property. Working with your adviser can help you avoid this cost & compliance risk.
Most retail and industry superannuation funds do not offer the option to invest directly in property, as investment decisions are managed on behalf of members. For individuals who wish to have direct control over property investments using their super, this is generally only possible through an SMSF, provided all regulatory, compliance, and suitability requirements are met.
Professional advice is highly recommended as this is a very complex area of superannuation legislation and getting it wrong may mean significant tax penalties for non compliance.
How RSM can help?
From our experience working with superannuation and property, many of these strategies can be effective in the right circumstances, but are often misunderstood. The rules are detailed and complex; what works well for one person may be entirely unsuitable for another.
If you would like to discuss your needs or explore your options, RSM SMSF specialists / Business Advisory and Financial Services can assist you and provide personal advice on whether an SMSF is right for you.
General Advice Disclaimer
Any information provided is general in nature and does not consider your individual objectives, financial situation or needs. It should not be relied upon as personal financial advice. Before making any decision, you should assess the appropriateness of the information having regard to your own circumstances and consider obtaining advice from a licensed financial adviser.
