Is It Worth Buying Property with Super?

Understanding the Basics of using your super to buy a house

Super and property: a risky move or a smart retirement strategy? For some, it is one of the best opportunities to boost wealth through real estate property. But like any other investment strategy, it comes with its own share of rules, responsibilities, and risks. Before diving in, it’s crucial to understand its compliance, benefits, and long-term impact. That’s exactly what we’ll explore in this blog.

What Does Buying Property with Super Mean?

Overview of using superannuation funds for property investment

In Australia, superannuation is a traditional vehicle for investing in shares or managed funds, it can also be used in real estate under specific conditions. 

Self-managed super funds (SMSFS) allow you to use this strategy by managing your funds yourself. It allows you to use your super fund to buy property under specific regulatory conditions. It is governed by strict rules and oversight from the Australian Taxation Office (ATO).

Distinction between personal property purchase and SMSF investment

It’s important to note that buying an investment property with super doesn’t mean purchasing a home for your personal use. Properties acquired through super must be held solely for investment purposes. 

All rental income or capital gains must remain within the SMSF until members meet the conditions of release, usually at retirement. Living in the property or renting it to a related party is strictly prohibited.

This approach is not available through traditional superannuation funds like industry or retail super funds. Instead, you’d need the establishment and administration of an SMSF. This adds a layer of responsibility and complexity for investors.

Legal Framework and Eligibility

Using super to buy property is only permitted via an SMSF structure. To proceed, the first step is setting up a compliant SMSF in line with ATO regulations. This includes:

• Creating a trust deed
• Appointing trustees
• Registering the fund
• Setting up a bank account
• And creating an investment strategy.

The SMSF, once established, may acquire property directly or fund the purchase via a limited recourse loan. This allows the fund to borrow money to acquire a single real estate asset. A separate trust holds the property, using it to back the loan.

However, strict compliance obligations apply:

• The investment must be made solely for providing retirement benefits to the fund’s members.
• The property must not be acquired from a related party, except in specific cases such as business real property.

• The property can’t be occupied or rented by members or their associates.
• All actions must align with the SMSF’s documented investment plan.
• Trustees must have annual audits, compliance reporting, tax filings, and proper documentation in place.

Breaching these regulations can result in significant financial penalties and could jeopardise the benefits associated with the fund.

Advantages of Using Super for Property Investment

Potential Tax Benefits

One of the most attractive reasons to use super to buy property is its tax efficiencies within an SMSF structure. Income generated from rent is taxed at a concessional rate of 15% while the fund is in the accumulation phase. Once the fund moves into the pension phase, that rental income may become completely tax-free.

SMSFs benefit from reduced capital gains tax. After 12 months, one-third of the gain is discounted, resulting in a 10% tax rate in accumulation. Taxes on capital gains may not apply during the pension phase. These savings can compound significantly over the long term.

Diversification of Retirement Portfolio

Traditional super portfolios are often heavily weighted towards equities, bonds, and cash. SMSF allows for diversification, which can help protect against volatility in financial markets.

Having a mix of asset classes can smooth out overall performance, particularly during economic downturns. As a tangible asset, real estate has its own set of risks and returns. This can contribute to a more balanced retirement portfolio.

Leverage Opportunities

An SMSF can use an LRBA to borrow funds and invest in property. This opens the door to acquiring higher-value assets than the fund could afford on its own. If the property’s value climbs while rent stays steady, profits can multiply.

Take this example: with $200,000 in available funds, an SMSF could potentially secure a $500,000 property using borrowed capital. This significantly expands its exposure to both capital growth and rental income. When applied wisely, this gearing strategy can accelerate the fund’s path to building long-term wealth.

Still, the risks of borrowing should not be overlooked. The SMSF is solely responsible for repaying the loan. If repayments fail, lenders can only recover the property used as collateral.

Control Over Investment Decisions

One advantage of an SMSF is the control it offers. You decide which property to purchase, how it’s maintained, and when to sell. This level of autonomy appeals to investors who want to apply their property knowledge and actively manage their super assets.

You are also responsible for determining the terms of the rental lease. You choose tenants (as long as they’re not related parties) and coordinate repairs or renovations. This must be done without breaching SMSF laws, however.

Rental Income Stream

Your fund can generate consistent income from a well-located property that has a strong rental demand. This rental income can help grow the value of your super over time. That’s especially helpful if it exceeds the property’s ongoing costs, such as interest repayments, maintenance, and administration fees.

In retirement, this steady cash flow may contribute to pension payments. It reduces dependence on other income sources and offers peace of mind during post-retirement years.

Risks and Considerations

Liquidity and Accessibility

Illiquid properties can take months to sell and convert to cash. This lack of liquidity poses challenges, especially if the fund needs to pay out member benefits or meet minimum pension requirements.

Liquidity becomes a more pressing issue as members near retirement age. Without a sufficient buffer in cash or other liquid assets, an SMSF may be forced to sell property under unfavourable conditions.

It’s also worth noting that the asset is owned by the fund, not by you. This means you can’t access the rental income or capital gains until you meet the required conditions of release.

Compliance and Management Complexity

Managing an SMSF is an active responsibility. Trustees must organise annual audits, prepare financial statements, lodge tax returns, and comply with superannuation laws. Adding property to the fund increases this complexity. It introduces extra tasks like tenant selection, rent collection, property maintenance, and ensuring ongoing legal compliance. These obligations require time, attention, and often professional support.

SMSFS are also subject to strict reporting obligations, and penalties can apply if trustees fail to meet their responsibilities. Working with qualified professionals (e.g. SMSF accountants or auditors) is often necessary, but it does increase costs.

Limited Negative Gearing Benefits

Negative gearing is where property expenses exceed income to create a tax-deductible loss. This offers limited advantages inside an SMSF. This is because SMSFS are taxed at a flat rate of 15%. As a result, the value of the tax deduction is lower than what a high-income individual might receive outside super.

To put it simply, loss-making properties don’t offer the same tax relief inside super. That’s why SMSFS are generally better suited to positively geared investments. Alternatively, they can focus on properties with strong potential for long-term capital growth. These strategies align more effectively with the structure and tax environment of an SMSF.

Making the Decision

Assessing Personal Financial Goals

When buying property with superannuation, consider the alignment with your broader retirement goals. If you’re an experienced investor comfortable with property markets and confident in your ability to manage an SMSF, the strategy can be highly rewarding.

However, if your goals include simplicity, liquidity, or minimal administrative duties, a property-focused SMSF may not be the right path. It’s essential to evaluate whether you have the risk appetite, time commitment, and long-term vision needed to make the most of this strategy.

It’s also important to consider your retirement timeline. The benefits of using super to invest in property typically accrue over the long term. That means it may not suit individuals approaching retirement who need accessible income soon.

Weighing Pros and Cons

Here’s a balanced look at what this strategy involves:

Pros:

• Concessional tax rates on rental income and capital gains
• Diversification into tangible assets
• Potential to leverage and grow the asset base
• Greater control over investment choices
• Long-term rental income stream for retirement

Cons:

• Illiquidity and delayed access to funds
• High compliance and administrative requirements
• Limited tax effectiveness of negative gearing
• Ineligibility for personal use of the property
• Potential financial risk from property market fluctuations

For many investors, these pros outweigh the cons. But that balance depends on your situation, goals, and preferences.

Conclusion: Is it Worth Buying Property with Super

Yes, but it’s not for everyone. Using your super to buy property can deliver strong long-term outcomes – if you have the right strategy, knowledge, and risk appetite. It’s ideal for investors who want control and are willing to take on the compliance and complexity of an SMSF. But for others, the demands may outweigh the benefits. 

Want expert guidance before you decide? Learn more at InvestorKit.

References

[1] – Ato.gov.au – SMSF Newsroom updates for individuals and families

[2] – Ato.gov.au – Capital gains tax on income within SMSFs

[3] – Ato.gov.au – Restrictions on business real property investments in SMSFs

[4] – Superhelp.com.au – Advantages of owning property through an SMSF

[5] – Loans.com.au – A guide to selling SMSF property