There’s two ways you can use superannuation to buy real property in Australia: through self-managed superannuation funds (SMSF) or through the first home super saver (FHSS) scheme. However, the two pathways speak to different buyers. First home buyers use the FHSS scheme to save funds for the property they’re buying and are required to live in; whereas the SMSF route is for investment and commercial properties where its rental income is returned to the SMSF. Importantly, for investment property purchases, the SMSF members can never live in the investment property, even in retirement.

First home super saver (FHSS) scheme

The first home super saver (FHSS) scheme is about using a regulated superannuation fund as tool to save for a first home purchase. Those savings can be used for any part of the property purchase and home loan terms (i.e. deposit, purchase costs, repayments etc.—the buyer decides). Not only does the FHSS scheme create a structured program for first home buyers, the amounts contributed receive a better tax rate, which creates more funds than if they were kept in a transaction account.

The FHSS scheme is used for first home buyers to purchase a residential property in Australia that buyers must move into live in as soon as it’s practical and live there for at least six months of the first 12 months after settlement.

The FHSS scheme works by making extra payments into a regulated superannuation fund through a salary sacrifice arrangement with an employer or by making voluntary contributions. The funds allocated to the FHSS scheme is capped at $15,000/financial year and $50,000 total. Many factors apply to ascertain if first home buyers are eligible for the FHSS scheme and the practical aspects of how to withdraw the funds in the property purchase process. Importantly, home buyers must not to sign any property contract before they request a FHSS determination from the Australian Taxation Office (ATO).

Here are some key points about the FHSS scheme:

  • Each year, the ATO will issue a ‘payment summary’ for tax return purposes.
  • If a debt is owed to the ATO, this can impact withdrawals both in the time and the amount (e.g. withdrawals can be reduced to zero if the ATO offsets an outstanding debt).
  • Contributions are taxed at the superannuation rate (usually 15%) rather than at income tax rates, which are higher in most cases.
  • Withdrawals are taxed at first home buyer’s marginal tax rate, minus a 30% offset.
  • Any funds that were released to the first home buyer can be returned without the yearly or total limit caps being impacted (from 15 Sept 2024).

Using a self-managed superannuation fund (SMSF)

As the name suggests, an SMSF is a private superannuation fund that’s managed by ‘self’ (as the trustee) for the benefit of its members (one to six people). It gives the members the flexibility to invest in a wide range of assets.

Using a self-managed superannuation fund (SMSF) to buy an investment property comes with a range of benefits and restrictions. From the outset, using a SMSF to buy an investment property is primarily concerned with ensuring the SMSF performs well, in terms of the return it provides the SMSF members in retirement. And just as an investment property is being used to generate income, the SMSF itself is a tool to gain certain tax concessions over the property’s rental income and capital gains tax when the property is sold. Importantly, just like any tax or investment strategy, the benefit of any tax concessions must be compared to other scenarios and be assessed in view of the time and money required to effectively run the SMSF. Getting professional advice is a must.

For business owners with an SMSF, they can buy commercial property and lease it back to their business through their SMSF. This allows the business owners to effectively pay off this asset while the funds stay in the SMSF. Again, there’s a range of tax benefits for a range of scenarios but is best to seek professional advice based on individual circumstances.

Putting aside the SMSF’s associated compliance and management costs. Buying real property creates property maintenance costs and obligations and can create liquidity issues if the SMSF needs to sell the asset to meet expenses.

Here are some key points about SMSF lending:

  • Not all lenders offer SMSF home loans.
  • Potentially borrowers (the trustee) pay higher interest rates.
  • Loans are usually for 70-80% of purchase price.
  • The SMSF must have sufficient funds to cover repayments, stamp duty, insurance, rates, and maintenance costs.
  • The lender’s rights are limited to the property attached to the loan, which means other assets in the SMSF and the members are protected from the lender.

Here are some key points about SMSF properties:

  • SMSF members can never live in the property, not even in retirement.
  • The property can’t be purchased/acquired from a SMSF member.
  • Major renovations on the property are prohibited as SMSF regulations say funds can’t be used within the construction industry.
  • Members can’t offset tax losses from the property against their taxable income (paid separate to the SMSF).

While the FHSS scheme and SMSFs can assist in purchasing real property through superannuation, they cater to different needs and have distinct eligibility criteria and risks. It's essential to seek professional advice before making decisions about superannuation, as the tax, legal, and financial implications can be complex.