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If you’re considering buying property, you might be wondering if you can use your super money to go towards a deposit or mortgage.

There are strict rules around when you can access your super because it’s intended to provide financial stability during retirement. However, you can make contributions to super as a tax-effective way of saving to buy property.

Saving for a house with the First Home Super Saver Scheme

In the 2017 federal budget, the government introduced the First Home Super Saver Scheme to help first home buyers enter the property market. The scheme is intended to increase the amount of money people can put towards a deposit thanks to the concessional tax rate and the higher rate of earnings through super.

As of 1 July 2017, you can make voluntary contributions into a superannuation account to save for purchasing a first home. As of 1 July 2018, contributions and returns made can be withdrawn at a concessional tax rate to put toward a house deposit.

Most people can salary sacrifice income to make pre-tax contributions to super as part of the First Home Super Saver Scheme. If you’re self-employed or don’t have the option to salary sacrifice, you can still make contributions and claim a tax deduction.

These voluntary contributions are included in the total super contribution cap for each financial year.

Pros and cons of the First Home Super Saver Scheme

For many people, the First Home Super Saver Scheme is a tax-effective way to save for a first home. However, it’s worth going over the positives and negatives.

Pros

  • Tax advantages – Money put into super from pre-tax income or as a voluntary contribution is taxed at a discounted rate, as are earnings generated. Plus, investing in the scheme can reduce your taxable income, and therefore lower the tax you pay on your income.
  • Higher returns – Typically, you will earn more on your investment than you would by putting your money into a savings account.
  • Contributions are made individually – If you’re part of a couple, you can both make contributions to the scheme within separate caps, then withdraw to put toward the one home deposit.

Cons

  • Funds can only be used to buy a property – Once you make contributions to your super, funds can only be withdrawn for the purpose of buying a property. Otherwise, it’ll be locked in your fund until your reach your preservation age.
  • Returns are fixed – The rate of return on contributions within the scheme is fixed. This means if your fund makes a bigger return, the additional money will stay in your account until you retire.
  • You may not have enough for a deposit – Depending on where you live in Australia, the money you’ve saved through the scheme may still not be enough for a deposit on a home – meaning you could also have to dip into other savings.

Can you invest in property through super?

If your super is part of a managed fund, some of your investment mix will typically include investments in property. In these cases, your fund’s trustee is responsible for investing your money. So, while you may be able to choose what percentage of your money you want to go towards property, the investment decision-making ultimately lies with the trustee.

If you have a self-managed super fund (SMSF), you can use your money to borrow and invest directly in property. However, the property has to be deemed as solely providing retirement benefits to fund members (i.e. you). That means it must be purchased as an investment rather than to live in.

Rules for buying property through an SMSF

To buy property through a self-managed super fund, the following rules apply:

  • The property has to be bought for the sole purpose of providing retirement benefits to you
  • You can’t buy the property from a relative or anyone associated with your SMSF
  • The property can’t be lived in by you or anyone associated with your SMSF
  • The property can’t be rented by you or anyone associated with your SMSF

While you can’t buy a property to live in through an SMSF, it is possible to buy a property that you use for business purposes – allowing you to pay rent to your SMSF.

Borrowing money with an SMSF to buy property

Generally, your SMSF can’t borrow money, but there are some exceptions, such as if you need cash to pay a member’s benefit or settle a share transaction. You can also borrow (“gear”) your super into property by investing in managed funds that borrow money.

Borrowing money to buy property using a self-managed super fund happens under strict borrowing conditions called a 'limited-recourse borrowing arrangement'. This arrangement can only be used to purchase a single asset, such as a residential or commercial property.

There are a number of risks to gearing an SMSF, such as higher loan costs, tax losses and the potential for substantial losses to your super. If you’re considering moving to an SMSF or borrowing through an SMSF, talk to a financial professional to make sure you understand the risks and obligations.

Frequently asked questions

Can I buy a house with my superannuation?

First home buyers are the only people who can use their superannuation to buy a property. The federal government has created the First Home Super Saver Scheme to help first home buyers save for a deposit. First home buyers can make voluntary contributions of up to $15,000 per year, and $30,000 in total, to their superannuation account. These contributions are taxed at 15 per cent, along with deemed earnings. Withdrawals are taxed at marginal tax rates minus a tax offset of 30 percentage points.

Voluntary contributions to the First Home Super Saver Scheme are not exempt from the $25,000 annual limit on concessional contributions. So if you pay $15,000 per year into the First Home Super Saver Scheme, you have to make sure that you don’t receive more than $10,000 in superannuation payments from your employer and any salary sacrificing.

How does the age pension work?

Most Australians who are of retirement age can qualify for the age pension. However, depending on the size of your assets and post-retirement income, you might be entitled to only a reduced pension. In some instances, you might not be entitled to any pension payments.

Is superannuation taxed?

Superannuation is taxed. It is generally taxed at 15 per cent. However, if you earn less than $37,000, you will be automatically reimbursed up to $500 of the tax you paid. Also, if your income plus concessional superannuation contributions exceed $250,000, you will also be charged Division 293 tax. This is an extra 15 per cent tax on your concessional contributions or the amount above $250,000 – whichever is lesser.

What is MySuper?

MySuper accounts are basic, low-fee accounts. If you don’t nominate a superannuation fund, your employer must choose one for you that offers a MySuper account.

MySuper accounts offer two investment options:

  1. Single diversified investment strategy

Your fund assigns you a risk strategy and investment profile, which remain unchanged throughout your working life.

  1. Lifecycle investment strategy

Your fund assigns you an investment strategy based on your age, and then changes it as you get older. Younger workers are given strategies that emphasise growth assets

How do you access superannuation?

Accessing your superannuation is a simple administrative procedure – you just ask your fund to pay it. You can access your superannuation in three different ways:

  • Lump sum
  • Account-based pension
  • Part lump sum and part account-based pension

However, please note that your superannuation fund will only be able to make a payout if you meet the ‘conditions of release’. The conditions of release say you can claim your super when you reach:

  • Age 65
  • Your ‘preservation age’ and retire
  • Your preservation age and begin a ‘transition to retirement’ while still working

The preservation age has six different categories:

Date of birth Preservation age
Before 1 July 1960 55
1 July 1960 – 30 June 1961 56
1 July 1961 – 30 June 1962 57
1 July 1962 – 30 June 1963 58
1 July 1963 – 30 June 1964 59
From 1 July 1964 60

There are also seven special circumstances under which you can claim your superannuation:

  • Compassionate grounds
  • Severe financial hardship
  • Temporary incapacity
  • Permanent incapacity
  • Superannuation inheritance
  • Superannuation balance under $200
  • Temporary resident departing Australia

Am I entitled to superannuation if I'm not an Australian citizen?

Yes, permanent and temporary residents are entitled to superannuation.

When did superannuation start?

Australia’s modern superannuation system – in which employers make compulsory contributions to their employees – started in 1992. However, before that, there were various restricted superannuation schemes applying to certain employees in certain industries. The very first superannuation scheme was introduced in the 19th century.

Who can open a superannuation account?

Superannuation accounts can be opened by Australians, permanent residents and temporary residents. You’re automatically entitled to superannuation if:

  • You’re over 18 and earn more than $450 before tax in a calendar month
  • You’re under 18, you work more than 30 hours per week and you earn more than $450 before tax in a calendar month

When is superannuation payable?

Employers must pay superannuation at least four times per year. The due dates are 28 January, 28 April, 28 July and 28 October.

When did superannuation start in Australia?

Australia’s modern superannuation system – in which employers make compulsory contributions to their employees – started in 1992. However, before that, there were various restricted superannuation schemes applying to certain employees in certain industries. The very first superannuation scheme was introduced in the 19th century.

How many superannuation funds are there?

There are more than 200 different superannuation funds.

How do you find lost superannuation funds?

Lost superannuation refers to savings in an account that you’ve forgotten about. This can happen if you’ve opened several different accounts over the years while moving from job to job.

You can use your MyGov account to see details of all your superannuation accounts, including any you might have forgotten. Alternatively, you can fill in a ‘Searching for lost super’ form and send it to the Australian Taxation Office, which will then search on your behalf.

How can I increase my superannuation?

You can increase your superannuation through a ‘salary sacrifice’. This is where your employer takes part of your pre-tax salary and pays it directly into your superannuation account. Like regular superannuation contributions, salary sacrifices are taxed at 15 per cent when they are paid into the fund.

What are the risks and challenges of an SMSF?

  • SMSFs have high set-up and running costs
  • They come with complicated compliance obligations
  • It takes a lot of time to research investment options
  • It can be difficult to make such big financial decisions

How do I set up an SMSF?

Setting up an SMSF takes more work than registering with an ordinary superannuation fund. 

An SMSF is a type of trust, so if you want to create an SMSF, you first have to create a trust.

To create a trust, you will need trustees, who must sign a trustee declaration. You will also need identifiable beneficiaries and assets for the fund – although these can be as little as a few dollars.

You will also need to create a trust deed, which is a document that lays out the rules of your SMSF. The trust deed must be prepared by a qualified professional and signed by all trustees.

To qualify as an Australian superannuation fund, the SMSF must meet these three criteria:

  • The fund must be established in Australia – or at least one of its assets must be located in Australia
  • The central management and control of the fund must ordinarily be in Australia
  • The fund must have active members who are Australian residents and who hold at least 50 per cent of the fund’s assets – or it must have no active members

Once your SMSF is established and all trustees have signed a trustee declaration, you have 60 days to apply for an Australian Business Number (ABN).

When completing the ABN application, you should ask for a tax file number for your fund. You should also ask for the fund to be regulated by the Australian Taxation Office – otherwise it won’t receive tax concessions.

Your next step is to open a bank account in your fund’s name. This account must be kept separated from the accounts held by the trustees and any related employers.

Your SMSF will also need an electronic service address, so it can receive contributions.

Finally, you will need to create an investment strategy, which explains how your fund will invest its money, and an exit strategy, which explains how and why it would ever close.

Please note that you can pay an adviser to set up your SMSF. You might also want to take the Self-Managed Superannuation Fund Trustee Education Program, which is a free program that has been created by CPA Australia and Chartered Accountants Australia & New Zealand.

What is salary sacrificing?

A salary sacrifice is where your employer takes part of your pre-tax salary and pays it directly into your superannuation account. Salary sacrifices come out of your pre-tax income, whereas personal contributions come out of your after-tax income.

How does superannuation work?

Superannuation is paid by employers to employees, at least once every three months. The ‘superannuation guarantee’ is currently 9.5 per cent – which means that your employer must pay you superannuation equivalent to 9.5 per cent of your salary. The guarantee is scheduled to rise to 10.0 per cent in 2021-22, 10.5 per cent in 2022-23, 11.0 per cent in 2023-24, 11.5 per cent in 2024-25 and 12.0 per cent in 2025-26.

Superannuation is generally taxed at 15 per cent. However, if you earn less than $37,000, you will be automatically reimbursed up to $500 of the tax you paid. Also, if your income plus concessional superannuation contributions exceed $250,000, you will also be charged Division 293 tax. This is an extra 15 per cent tax on your concessional contributions or the amount above $250,000 – whichever is lesser.

You can withdraw your superannuation when you meet the ‘conditions of release’. The conditions of release say you can claim your super when you reach:

  • Age 65
  • Your ‘preservation age’ and retire
  • Your preservation age and begin a ‘transition to retirement’ while still working

 

How do you calculate superannuation from a total package?

Superannuation is calculated at the rate of 9.5 per cent of your ‘ordinary-time earnings’. (For most people, ordinary-time earnings are their gross annual salary or wages.) So if you had a salary of $50,000, your superannuation would be 9.5 per cent of that, or $4,750. This would be paid on top of your salary.

As the Australian Taxation Office explains, some items are excluded from ordinary-time earnings. They include:

  • Overtime work paid at overtime rates
  • Expense allowances that are fully expended
  • Expenses that are reimbursed
  • Unfair dismissal payments
  • Workers’ compensation payments
  • Parental leave
  • Jury duty
  • Defence reserve service
  • Unused annual leave when employment is terminated
  • Unused long service leave when employment is terminated
  • Unused sick leave when employment is terminated

Although the superannuation guarantee is currently at 9.5 per cent, it is scheduled to rise to 10.0 per cent in 2021-22, 10.5 per cent in 2022-23, 11.0 per cent in 2023-24, 11.5 per cent in 2024-25 and 12.0 per cent in 2025-26.

How much is superannuation?

Superannuation is currently 9.5 per cent – which means that your employer must pay you superannuation equivalent to 9.5 per cent of your salary.

The ‘superannuation guarantee’, as it is known, has been at 9.5 per cent since the 2014-15 financial year. It is scheduled to rise to 10.0 per cent in 2021-22, 10.5 per cent in 2022-23, 11.0 per cent in 2023-24, 11.5 per cent in 2024-25 and 12.0 per cent in 2025-26.

What are ethical investment superannuation funds?

Ethical investment funds limit themselves to making ‘ethical’ investments (which each fund defines according to its own principles). For example, ethical funds might avoid investing in companies or industries that are linked to human suffering or environmental damage.