If you’ve ever wondered whether you can use your superannuation to buy a house, the short answer is yes—but there are specific conditions and rules to follow. In Australia, the First Home Super Saver (FHSS) scheme allows eligible first-home buyers to withdraw a portion of their super to help with a property purchase. Superannuation can also be used to buy investment properties under certain circumstances. However, these options come with advantages, limitations, and risks that you need to carefully consider.
This article explores how to use super to buy property, the rules under the FHSS scheme, and other possibilities, such as using self-managed super funds (SMSFs). We’ll also highlight the potential risks to help you decide whether this approach suits your financial goals.
First thing’s first, whether you’re considering the FHSS scheme to secure your first home or an SMSF for investment, using your super to buy property is a big financial decision. It offers a unique opportunity but also comes with risks that can impact your long-term retirement plans. Consulting a financial advisor can help you understand the rules, evaluate your options, and make an informed choice.
By leveraging your super effectively, you may be able to achieve your property ownership goals while maintaining a balanced approach to your retirement savings.
The First Home Super Saver (FHSS) scheme is a government initiative designed to help first-home buyers save faster for a deposit by leveraging the tax advantages of superannuation. Under this scheme, individuals can make voluntary contributions to their super fund and later withdraw those contributions, along with associated earnings, to buy their first home.
It’s important to note that you cannot use your existing super balance for a home purchase, as this remains preserved for your retirement savings. Instead, the scheme focuses solely on voluntary contributions.
The FHSS scheme allows eligible individuals to make extra contributions to their superannuation account, which can then be withdrawn for a home deposit. Here’s how it works:
Eligibility includes being at least 18 years old, never having owned property in Australia, and intending to live in the purchased property as your primary residence. Importantly, eligibility is also assessed on an individual basis, meaning two people could each contribute to their super, and access their own FHSS contributions to purchase the same property.
You can make contributions to your FHSS through:
This amount can be applied toward purchasing a new or existing home but cannot be used for investment properties or vacant land unless you have a contract to build.
Once your funds are released, you must sign a contract to purchase or build a home within 12 months. If you fail to do so, the withdrawn amount may be subject to a hefty 20% tax, so it’s crucial to plan carefully.
Here’s an example of how the FHSS scheme can boost your savings:
In this example, if you’re earning $85,000 annually and contribute $10,000 to your super fund through the FHSS scheme, the tax savings alone make a significant difference.
Normal Savings Account*:
If you contribute the $10,000 to a regular savings account, it will be taxed at your normal income tax rate. Given your salary, you fall into the 32.5% tax bracket, meaning you’ll pay:
10,000×0.325=3,250
So, you would pay $3,250 in tax on the $10,000 and only save $6,750.
FHSS Account:
By using the FHSS scheme, the tax rate on the $10,000 is only 15%. This means you would pay:
10,000×0.15=1,500
So, you would only pay $1,500 in tax on the $10,000, therefore saving $8,500.
The Savings
The difference is significant — by using the FHSS account, you save $1,750 in tax:
3,250−1,500=1,750
This extra money could help you reach your home deposit goal faster, which is why the FHSS scheme is an attractive option for first-time homebuyers.
Using your superannuation for a home deposit through the FHSS scheme provides tax advantages, but it’s important to carefully evaluate the potential risks.
Impact on Retirement Savings
Superannuation is designed to grow over decades through compounding returns. Withdrawing funds early—even a modest amount—can significantly reduce your balance at retirement. This trade-off becomes more critical if your super balance is already low or if you intend to rely heavily on it later in life.
Tax and Compliance Risks
The FHSS has strict rules that must be followed. For instance, funds withdrawn must be used to purchase or build a property within 12 months. Failure to meet this deadline could result in penalties, including additional tax liabilities or the need to return the funds to your super account. Furthermore, only voluntary contributions—capped annually at $15,000 with a lifetime limit of $50,000—are eligible for withdrawal. These limitations may not provide sufficient assistance for buyers in high-cost property markets.
Market and Affordability Challenges
Superannuation balances are subject to market performance. A downturn could reduce the amount of money available for withdrawal, impacting your ability to meet deposit goals. Additionally, while the FHSS can help with a deposit, it doesn’t address other significant financial requirements for homeownership, such as loan repayments, stamp duty, or maintenance costs.
Seeking Professional Advice
Before using superannuation for a home deposit, carefully assess these risks and their potential impacts on your financial future. Consulting a qualified financial advisor can help ensure this strategy aligns with your long-term goals and circumstances.
A Self-Managed Super Fund (SMSF) offers a pathway to invest in property under specific conditions, but it’s important to understand the complexities and responsibilities involved, remember, before you make any decisions, it is important to get advice from a licensed financial adviser.
Buying property through a Self-Managed Super Fund (SMSF) comes with specific legal and regulatory requirements designed to protect retirement savings. One of the fundamental rules is meeting the sole purpose test, meaning the property must solely provide retirement benefits to the SMSF members and not offer any personal benefit before retirement.
Additionally, SMSFs are prohibited from acquiring property from related parties, unless it falls under certain exemptions such as business real property. Even in those cases, the transaction must occur at market value to ensure fairness and compliance.
Restrictions extend to the use of SMSF-purchased property. Members and their related parties cannot live in or rent the property, even temporarily (no holiday homes!). Borrowing to buy a property via an SMSF is achieved through a limited recourse borrowing arrangement (LRBA). Only a single asset can be purchased with the LRBA, for more information on LRBA’s, see the ATO’s website here.
Finally, the property investment must align with the SMSF’s documented investment strategy, which should consider factors such as diversification, liquidity, and risk. Trustees are responsible for regularly reviewing and updating this strategy to ensure ongoing compliance and alignment with the fund’s objectives.
When purchasing property through a Self-Managed Super Fund (SMSF), it’s important to understand the limitations set by the Australian Taxation Office (ATO) and other regulatory bodies.
Residential Property
An SMSF can invest in residential property; however, there are strict rules surrounding its use. Property purchased through the SMSF cannot be lived in by the trustees, members, or any related parties, including family members. Additionally, the property cannot be rented out to any of these parties, regardless of the relationship. If you already own a residential property, you cannot transfer it into your SMSF, even at market value, as this would violate the rules around personal use of SMSF assets. The residential property must remain purely for investment purposes.
Commercial Property
SMSFs can also be used to invest in commercial property, such as office buildings, warehouses, or retail spaces. If the SMSF acquires a commercial property, it can be rented to a business owned by a member of the fund, but there are strict rules that need to be followed. The lease must be at market rates for instance and the arrangement must make sure it benefits the fund’s purpose of providing retirement benefits. These types of investments must still comply with the sole purpose test, and any leasing agreements must be structured properly.
While the opportunity to diversify your superannuation portfolio is attractive, trustees should be aware of the following risks:
Seek Professional Advice
Investing in property through an SMSF involves complex legal and financial considerations. Consulting with a licensed financial advisor is essential to ensure compliance with regulations and alignment with your retirement goals.
* The information provided on this site is on the understanding that it is for illustrative and discussion purposes only. Whilst all care and attention is taken in its preparation any party seeking to rely on its content or otherwise should make their own enquiries and research to ensure its relevance to your specific personal and business requirements and circumstances. Fundli disclaims all liability for any decisions made based on the information provided. Investments carry risks, including the potential loss of principal. Always do your own research before making financial decisions.
