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The SIMPLE answer to this question is.. no.

But as with most financial matters, the real answer to whether you can purchase a house with your super is, it depends. It all boils down to:

  • The purpose of the property purchase
  • How much you have in your superannuation
  • Changes in Australian legislation

Traditional, industry super funds (like Australian Super and Rest Super) and retail super funds (like BT, AMP or MLC) normally don’t offer the option to buy an investment property with your funds. These super companies have millions of members in them, and wouldn’t go to the trouble of buying a specific investment property which only you are interested in.

Enter the SMSF. Self Management Super Funds (SMSFs) allow more freedom for members to invest in direct assets, like property, among other asset types. This is because the member is also the trustee of the fund, and carries all the responsibilities which Australian Super or MLC normally carry for their members.

The Purpose of Superannuation

The money in your superannuation is bound by the sole purpose test. This is a rule that limits how you can use and invest your super funds. Essentially, this rule states that your superannuation must be used for the sole purpose of providing retirement benefits to you or your dependents.

In particular, this means that you can’t use your super funds for purchasing a non-investment asset (like something which might give you a benefit today) before you reach the relevant retirement age.

So does your own home pass the sole purpose test? Sadly not.

An SMSF can buy residential property, as long as it’s not bought from a related party (i.e. relatives and/or business partners of a member) and it cannot be lived in by a related party.

However, you can buy an investment property that you rent to tenants who are not fund members or relatives. The Australian Taxation Office (ATO), your financial advisor or your accountant should be able to provide more information on the sole purpose test.

How much do you have in Super?

The general consensus is that $200,000 is enough to make an SMSF cost-competitive with certain traditional super funds, if investing in low-cost investments. However, this scenario assumes more standard investments like shares and managed funds. It doesn’t assume you are purchasing a $500,000 property! To have enough funds to comfortably purchase a property in your super, you first need to ensure you will have:

  • Sufficient deposit to meet minimum advised criteria (ranging from 20%-30% of the purchase price, depending on who you ask)
  • Adequate surplus cash in the SMSF to cover costs and insurance premiums
  • Regular income which is sufficient to cover any negative gearing shortfall on a property
  • Enough other assets in the fund to ensure your portfolio is adequately diversified

If you’re considering setting up an SMSF to purchase a property, it’s crucial that you consider all of the establishment and ongoing administration costs involved, as well as the weighty responsibilities which you are signing up for. Superguide has produced an in-depth summary of the average costs on setting up and running an SMSF. Depending on the balance of the fund, you can expect to pay anywhere between $2,675 – $12,000 pa, on top of the high costs to establish the fund.

To learn more about whether this option might be right for you, read our article Is Property in an SMSF right for me? or give us a call on 1300 205 292 to organise a time to discuss this with a qualified adviser.

A Potential Change on the Horizon?

Recently there has been of public debate about whether super could be used to purchase a home for a first-home-buyer. This argument has been voiced strongly after complaints about the high cost of housing, particularly in Sydney and Melbourne.

As is clear from the Sole Purpose Test, this goes against the core function of what Super was created for – safekeeping of funds which are preserved solely for your retirement. While using super may offer short term benefits for some first home buyers, there will likely be dangerous long-term ramifications if such a proposal goes ahead.

At this stage, there is no indication that Super legislation will change to accommodate some first-home-buyer’s short term desires. However, there are always other options which can be considered.

Talk with your financial advisor about options and ideas for how you could afford to purchase a home.

What are your creative ideas for helping first-home buyers break into the market?