Buying A Property With Super
People often ask how to buy a property with your superannuation. In this article we will discuss the purchasing of a property in a Self-Managed Super Fund (SMSF) and guide you through the considerations for purchase in NSW Australia.
Buying a property using your superannuation (super) in New South Wales (NSW), Australia, is possible through a SMSF. However, there are specific rules and regulations you need to follow. Here’s an overview of the process:
1. Set Up a Self-Managed Super Fund (SMSF)
If you don’t already have an SMSF, you’ll need to establish one. This will be done via your Accountant and your Lawyer.
A SMSF allows you to have more control over your super investments, including buying property with superannuation.
Most SMSF have a corporate trustee which controls the fund (a company) to which usually 2 of the members are directors. You can also be individual trustees of the fund (2 people are required).
If you intend on purchasing property inside your SMSF and will require finance for the purchase, a Bare Trust will be established with an additional corporate trustee, which will allow you to obtain finance for the purchase, as this can not be done directly in a SMSF.
2. Property Investment Strategy
SMSF have rules and regulations, and one of them is that you must have an investment strategy that outlines how the property purchase aligns with your retirement goals.
This strategy should consider diversification, risk tolerance, and the expected returns from the property investment. This will be prepared by your Financial Advisor and your proposed purchase must fit within that strategy.
The ATO provides great resources in relation to your Investment Strateg which you can view here: https://www.ato.gov.au/Super/Self-managed-super-funds/Investing/Your-investment-strategy/
3. Eligibility and Restrictions
To purchase a property inside a SMSF you must meet eligibility requirements. This includes that all purchases must be an “arm’s length transaction” You need to meet specific criteria, and there are restrictions on the types of properties you can buy, such as residential or commercial properties. Additionally, the property cannot be owned by a member of the SMSF or a related party.
You can read more about the restrictions of SMSG here: https://www.ato.gov.au/Super/Self-managed-super-funds/Investing/Restrictions-on-investments/
4. SMSF Funds and Borrowing
To buy property using your super, you can borrow funds within your SMSF through a Limited Recourse Borrowing Arrangement (LRBA). This arrangement allows your SMSF to borrow money to purchase a property, but the borrowing is limited to that property only, and the lender’s recourse is limited to the property itself (hence “limited recourse”). This will be affected through a Bare Trust and the use of a Corporate Trustee to manage that Trust.
Your Lawyer and Accountant will work together to prepare all necessary materials for this to happen.
5. Legal and Financial Advice
Given the complexity of buying property through an SMSF, it’s crucial to seek legal, financial, and tax advice. Professionals can help you understand the legal implications, tax obligations, and compliance requirements associated with SMSF property investment.
Without the proper advice, you can make mistakes which may lead to fines, penalties and criminal sanctions. Owning a SMSF is a complicated business – but it can be made much easier if you have the right advice from the outset!
6. Property Purchase
Once your SMSF is set up you can identify a suitable property for investment. The property must be acquired at market value and should be in line with your SMSF’s investment strategy.
It is important that the transaction is at arm’s length and that you meet the criteria for purchase.
7. Compliance and Record-Keeping
Your SMSF is also required to undertake yearly compliance and record keeping. Ensuring that your SMSF complies with all relevant laws and regulations is essential. You need to keep accurate records of all transactions, including property purchase, expenses, and rental income.
The ATO outlines the administration and reporting requirements here https://www.ato.gov.au/Super/Self-managed-super-funds/Administering-and-reporting/
You are also required to audit your fund each year by a certified auditor. https://www.ato.gov.au/Super/Self-managed-super-funds/SMSF-auditors/
8. Loan Repayment and Management:
If your SMSF took out a loan to buy the property, loan repayments must come from your SMSF funds alone. You would usually use the rent you have received from your tenant to meet all of the expenses of the property. You need to manage the property, handle expenses, and ensure that the property generates income for your SMSF. You can utilise accounting software to assist you with this.
You will also need to prepare tax returns and pay tax on the income you make within your SMSF through the property. https://www.ato.gov.au/Super/Self-managed-super-funds/Tax-on-income/
9. Sole Purpose Test
Remember that the primary purpose of an SMSF is to provide for retirement. Any investment, including property, should be made with this sole purpose in mind.
The ATO states:
“Your SMSF needs to meet the sole purpose test to be eligible for the tax concessions normally available to super funds. This means your fund needs to be maintained for the sole purpose of providing retirement benefits to your members, or to their dependants if a member dies before retirement.
Contravening the sole purpose test is very serious. In addition to the fund losing its concessional tax treatment, trustees could face civil and criminal penalties.
It’s likely your fund will not meet the sole purpose test if you or anyone else, directly or indirectly, obtains a financial benefit when making investment decisions and arrangements (other than increasing the return to your fund).
When investing in collectables such as art or wine, you need to make sure that SMSF members don’t have use of, or access to, the assets of the SMSF.
Your fund fails the sole purpose test if it provides a pre-retirement benefit to someone – for example, personal use of a fund asset.”
10. Regular Reviews
Regularly review your SMSF’s investment strategy and the performance of the property. If necessary, making adjustments to align with changing market conditions and your retirement goals is essential for the proper functioning of your fund.
Buying property with super in NSW requires careful planning, adherence to regulations, and a solid understanding of your SMSF’s financial capabilities and responsibilities. To ensure you’re making informed decisions, work closely with professionals who specialise in SMSFs, property investment, and financial planning. At ALA Law, our lawyers understand SMSF compliance and regulations and can guide you through this process.
How to Buy a Property using Super for First Home Buyers
How can a first home buyer use their super to purchase a home? Well, under the First Home Super Saver Scheme (FHSS), first home buyers who meet eligibility criteria may be at liberty to access portions of their superannuation to help purchase their first home.
The scheme allows you to make voluntary contributions into your superannuation fund for the purposes of your first home and then if you meet the eligibility requirements (listed below) you can apply for a maximum of $15,000 of your voluntary contributions to be release for any one financial year, up to the sum of $50,000 in total.
It is important to note that only voluntary additional contributions can be accessed, not your compulsory employer contributions.
- You can make the following types of contributions under the FHSS scheme:
- Voluntary concessional contributions – including salary sacrifice amounts or contributions you have claimed or intend to claim a tax deduction for (usually taxed at 15% in your fund)
- Voluntary non-concessional contributions – including personal after-tax contributions (where you haven’t claimed a tax deduction).
Only contributions made from 1 July 2017 are eligible for release under the FHSS scheme.
What are the eligibility requirements for the First Home Buyers Super Scheme?
The ATO outlines the following eligibility criteria:
To use this scheme, you must satisfy all of the following conditions:
- You’re 18 years old or older when requesting a FHSS determination or a release of money under the FHSS scheme. However, you can make eligible contributions before you are 18 years of age.
- You’re a first home buyer, having never owned property in Australia – this includes an investment property, vacant land, commercial property, a lease of land in Australia, or a company title interest in land in Australia (unless we determine you have suffered a financial hardship).
- You intend to occupy the property you buy as soon as practicable and for at least 6 months within the first 12 months you own it after it’s practical to move in.
- You have not previously made a FHSS release request.
You don’t need to be an Australian citizen or an Australian resident for tax purposes to use the FHSS scheme.
Eligibility is assessed on an individual basis. This means that couples, siblings or friends can each access their own eligible FHSS contributions to purchase the same property. If any of you have previously owned a home, it will not stop anyone else who is eligible from applying.”
How do I apply to release my FHSS for buying my first home?
When you are ready to proceed with your purchase you must apply for FHSS determination and then a release. This is a two-step process. You MUST not sign a contract to purchase a property prior to receiving the release. If you sign a contract, you are no longer eligible for the scheme.
The ATO lists the steps of the application process here: https://www.ato.gov.au/Individuals/Super/Withdrawing-and-using-your-super/First-Home-Super-Saver-Scheme/#Requestingadeterminationstep1
The team at ALA Law can assist you with the process of purchasing a home and guide you in the right direction regarding the FHSS and other options available to first home buyers. Give our friendly and knowledgeable team a call to discuss.