Property Investing

Using Your Super to Invest in Property in Australia - SMSF Guide

Published 24th February 2021Updated 12th January 2023

using super to invest in property

When it comes to investing in property, it can be hard to get enough capital to make things work - especially if it’s your first time dipping your toes into the market. But you might be thinking - can I use my super to buy an investment property? 

Yes, you can use your superannuation to invest in real estate, but it’s not as simple as it sounds! From setting up a self-managed super fund (SMSF) to making sure your investment fulfills the sole purpose test, there’s a lot to figure out before you make that leap.

We'll explain exactly what’s involved, so you can decide if using super to buy an investment property is the right choice for you!

As always, you should speak to a qualified financial advisor about your specific circumstances before making a decision.

What is a self-managed super fund (SMSF)?

A self-managed super fund (SMSF) is when one or more people have decided to manage their superannuation on their own. Each person is a trustee for the super fund which means they’re responsible for ensuring the fund is running smoothly, and they also get to choose exactly how the fund is invested.

How to set up an SMSF

Here’s how you can join over 1.1 million Aussies who are taking control of their super by setting up an SMSF:

  1. Choose your trustees. An SMSF can have 2-4 individual trustees or a corporate trustee with 1-4 directors. Read the ATO's breakdown of the pros and cons of the trustee options.
  2. Draw up a trust deed and an investment strategy. These documents lay out the SMSF’s objectives, members, investment plan, and how benefits can be paid. Don’t forget to specify that using super to buy an investment property is allowed!
  3. Set up your trust. A super fund is a trust where trustees hold assets to provide retirement benefits to its members. You’ll need some cash to start out, but there’s no minimum amount required to start an SMSF.
  4. Obtain an ABN. Getting an ABN is simple if you're eligible, and takes about 10 minutes. To get an ABN, go to the Australian Business Register's website.
  5. Register the fund. This ensures the fund can access tax concessions and GST, while members can claim tax deductions for contributions! 
  6. Open a bank account. This account will be used to accept contributions and pay for any expenses and liabilities. You can also transfer the existing super here too. Here's the definitive guide to Open Banking in Australia for your financial services.
  7. Obtain an electronic service address. This enables members to receive employer contributions. Here's a list of electronic service address providers.

What’s involved in using SMSF to buy an investment property?

Before you jump into using super to buy property, there are a few important things to consider:

1. Make sure your investment fulfills the ‘sole purpose’ test.

Any investment made under a super fund has to be for the sole purpose of increasing retirement funds, not so you can benefit from the money ASAP. This means you can’t:

  • Rent out the property to family members or fellow trustees
  • Rent out the property at lower than the market rate
  • Purchase property from a family member
  • Live in the property yourself.

In other words - it’s essential to make sure the property must be a long-term investment that aligns with the SMSF’s investment strategy.

2. Will you need a loan?

If you need extra capital to fund your investment, you’ll be able to access a loan known as a limited recourse borrowing arrangement, or LRBA. When it comes to LRBAs, it’s important to keep the following in mind:

  • The SMSF must have a balance of at least $200,000 
  • Loan repayments must be made through the SMSF
  • Other assets in the SMSF cannot be sold to repay the loan.

It’s a good idea to talk to a financial professional before engaging in an LRBA, especially as they are slightly more complicated than normal loans and require strict compliance!

Should you use an SMSF to invest in property?

Now you’re aware of what to consider, but are SMSFs a good idea? We’ve broken down the pros and cons to help you out below!

Pros of using an SMSF to invest in property

  • Access to increased capital: By buying a house through super, you may be able to buy a great investment property you wouldn’t have been able to otherwise!
  • Lower tax rates: With an SMSF you'll pay less taxes on your investment property. Compliant SMSFs can take advantage of the 15% tax rate on any rental income from your investment property. If you don’t sell your property until the fund is in the pension phase, there’s also 0% tax on any capital gains!
  • Can increase ROI for your super fund: Making a good investment can also increase your future retirement savings, which is a win-win for you and your trustees.

Cons of using an SMSF to invest in property

  • Increasing risk exposure to your pension: Using super to buy property means you’ll be putting a lot of eggs in one basket, so it’s essential to make sure your SMSF investment strategy attempts to diversify your property portfolio to reduce risk.
  • Compliance is essential: Managing your own super can be a pain, as yearly audits must be undertaken by an approved auditor to make sure your fund is following the rules. If your SMSF is found to be non-compliant, all of its income will be taxed at the highest marginal tax rate!
  • Restricted loan options: Unlike personal property purchases, LRBAs have strict rules which must be complied with at all times and it’s essential to make sure your SMSF can make monthly repayments.
  • All transactions must be at arm's length: This means you can’t do business with those considered ‘associates’ of fund trustees. Associates include family members and business partners.

So, is it worth it to buy property with an SMSF?

At the end of the day, using your super to buy property can be a great option for someone who really knows the market inside-out and wants full control over their investment. If you’re someone that can balance the potential risk of putting all your eggs in one basket with the gains that can be made from buying a house with super, you could really make a killing!

But you’ll need to be prepared to take on the responsibility of setting up and managing a fully compliant SMSF, to ensure you can take advantage of lower tax rates.

Disclaimer: The views, information, or opinions expressed in this blog post are for general information purposes only and should not be relied upon. We have not taken into account specific situations, facts or circumstances, and no part of this blog post constitutes personal financial, legal, or tax advice to you.

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