Can I Use My Super to Build a House?

If you’ve been trying to achieve the Great Australian Dream of home ownership but are struggling to build a sizeable deposit, there are some alternative ways to do it. If you’ve ever wondered whether you can leverage your retirement savings for something other than retiring, you’ll be happy to know you can now use your superannuation to build a house.

Here’s what you need to know about all the different ways you can build or buy property using your super – including all the benefits and potential downsides to consider.

Ways to Build or Buy Property Using Your Superannuation

You don’t need to be in your golden years to enjoy all the wealth you’ve accumulated in your superannuation account. On the contrary, the Australian government has made it easier than ever to put those before tax contributions to good use in a number of different ways.

1. First Home Super Saver (FHSS) Scheme

The First Home Super Saver (FHSS) Scheme allows eligible Australians to make voluntary contributions into their super to save for their first home. You can then apply to release these contributions, along with other earnings, to help fund the construction or purchase of a home.

As with all government schemes, there are limits to the amount you can contribute and withdraw under the FHSS. That’s why you’ll need to stay across the latest guidelines from the Australian Taxation Office (ATO), as well as speak to your financial advisor or tax agent to ensure any decisions you make are compliant under the scheme.

How Does the First Home Super Saver Scheme Work?

• Voluntary contributions: If you are eligible, you can make additional voluntary contributions to your super fund, which are then earmarked under the FHSS scheme. These contributions can be salary sacrifice contributions or personal after tax contributions for which a tax deduction is claimed.

• Contribution limits: There are annual and total limits on the contributions you can make under this Scheme. For the 2022–23 financial year, for example, the maximum total contributions allowed are $15,000 per financial year and $50,000 in total.

• Request for release: Once you've made the contributions, you can apply to release these funds along with any other associated earnings to help fund your first home.

• Eligibility criteria: To be eligible, you need to meet certain criteria, including being 18 years or older, never having owned property in Australia and intending to live in the property as soon as possible.

• Tax benefits: Contributions made under the FHSS scheme receive concessional tax treatment within your super fund. When released, the taxable portion is subject to a lower rate compared to your marginal tax rate.

• Withdrawal process: After applying for a release, the ATO determines the amount that can be released and will instruct your super fund to make the payment. You will then need to sign a contract to begin the buying or building process within 12 months.
  

Am I Eligible to Use the FHSS Scheme?

To be eligible for the FHSS, you must:

1. Be 18 years or older.

2. Never have owned property in Australia.

3. Intend to live in the property as soon as practicable.

How Much Can I Put Towards My Deposit?

According to the ATO’s eligibility requirements and ongoing criteria for the FHSS scheme: “You can apply to have a maximum of $15,000 of your voluntary contributions from any one financial year included in your eligible contributions to be released under the FHSS scheme. You are limited to a total of $50,000 contributions across all years.”

FHSS Tax Considerations

Contributions made to your super fund under the FHSS Scheme are considered concessional contributions. These are contributions where a tax deduction is claimed.

When you withdraw super funds under the FHSS scheme, there are two components: the contributions you made and any associated earnings. The contributions are not taxed when withdrawn, but the associated earnings are subject to tax.

The amount released under the FHSS scheme is taxed at your marginal tax rate, minus a 30% tax offset. If your marginal tax rate is lower than 30%, you'll receive a refund for the difference. If it’s higher, you may need to pay extra tax.

What If I Don't End up Building a Home?

You have 12 months from the date you make a valid release request to notify the ATO you have signed a contract to buy or build your home. If you decide not to use the released funds to buy or build a home, you have two options.

The first option is to recontribute the funds (up to the amount released) into your super account. These recontributions are treated as non-concessional contributions and are subject to the non-concessional contributions cap.

If you don't recontribute the funds, they will be taken as assessable income in your tax return for the financial year in which the funds are not used. This amount will be taxed at your marginal tax rate. The tax liability on the released funds is due at the time of lodging your tax return.

Be aware that if you choose not to build or buy a home, you need to notify the ATO before the end of the financial year in which you decide not to proceed. This allows the ATO to adjust the tax liability on the released funds.

How to Apply

When you want to get your FHSS money, you have to ask the ATO for approval and then get the money released. It's a two-step process: determination and release. You must get approval from FHSS before you make any contracts that are involved in getting a property, including buying land.

2. Self-Managed Super Fund (SMSF)

If you have a self-managed super fund then you may be able to use it to invest in a new home or buy land, however there are a number of restrictions.

Can I Build a House with an SMSF?

The short answer is no. You can’t build on vacant land using funds from your self-managed super fund. However, the dream isn’t over just yet. You can buy land or an existing property.

For those who want to build their dream home though, it may be more appropriate to take advantage of the FHSS scheme to build a house with your super.

Self-Manager Super Fund Rules

Be aware there are several rules around buying property through a self-managed super fund. SMSFs can invest in residential or commercial property, including vacant land, but there are strict guidelines to follow:

• Sole purpose test: The investment must meet the sole purpose test, which means it should solely provide retirement benefits for fund members.

• Buying from a related party: If purchasing the property from a related party (members or their associates), the property must be business real property, and the acquisition should be at market value.

• Restrictions on use: While residential property can be bought, it must not be used by a fund member or any related parties. Commercial properties have more flexibility.

• Property improvements: When buying vacant land, the SMSF cannot use funds to build a residential or commercial property on it.

• Borrowing restrictions: If the SMSF is borrowing to purchase property, it must follow the limited recourse borrowing arrangements.

• Compliance with legislation: SMSFs must comply with the Superannuation Industry (Supervision) Act and other relevant laws.

What are the Costs of an SMSF Property?

Selling a property in your SMSF can incur a few different fees, and these costs can really chip away at your super balance. Here are some of the biggest costs you’ll need to factor in:

• Upfront fees

• Legal fees

• Professional advice fees

• Stamp duty

• Ongoing property management fees, such as maintenance, rates and insurance.

• Commissions payable to developers or real estate agents.

• Bank fees and loan costs, including interest on any loans.

Are There Any Risks of Using SMSF?

Yes, there are risks if you plan on using your SMSF to buy property. From potential financial losses and liquidity issues to strict compliance requirements – it's a good idea to speak to a professional before making any major financial decisions around your super and property investments.

3. You've Reached Preservation Age

Are you a retiree looking to buy or build your home on the Gold Coast or any other dream location around Australia? You’re in luck!

Once you have reached what’s known as ‘preservation age’, you can access your superannuation for any reason. For most people, that means you’re in your 60s and retired, or after you turn 65 – even if you are still working.

With the funds you’ve accumulated in your super over decades of working, you can pour everything into finding the perfect plot of land and building the home you’ve been dreaming about.

5 Benefits of Accessing Your Super to Build a House

1. Access to helpful schemes: You can now access your super to build a house thanks to the FHSS scheme, which may also come with tax advantages and help you save for your first home.

2. Tax benefits: Contributions made under the FHSS are taxed at a lower rate, which translates to potential tax savings compared to standard super contributions.

3. Become a home owner faster: Using your super can speed up your journey to homeownership, especially for first-time buyers.

4. Personalise your dream home: Building a home rather than buying an existing property means you can customise your home to meet your lifestyle needs and design tastes.

5. Start building a portfolio: Directing your super toward property investment will diversify your portfolio and finally put you on the property ladder – with the potential for long-term capital growth and financial security ahead.

3 Potential Downsides of Using Your Super to Build a House

1. Less for your retirement savings: Drawing from your super to build a house can diminish your retirement savings. This may impact the overall nest egg you are able to build for retirement.

2. Impact on compound growth: The compounding effect of superannuation can be huge over several decades. Early withdrawals may interrupt this compounding growth and limit your potential wealth at retirement.

3. Strict eligibility criteria: Accessing your super to build a house involves meeting strict eligibility criteria.

Are There Any Alternatives to Using Super?

Living in Australia means you have access to a range of grants and schemes that can help everyday people fund their dream of home ownership. This includes not just the FHSS scheme, but also the First Home Owner Grant, which provides a generous $30,000 cash injection for those buying or building a new house in Queensland for up to $750,000.

If you don’t quite have enough for a deposit just yet, which is approximately 20%, then many lenders may lend you as much as 95% of the property value with the inclusion of Lenders Mortgage Insurance. Be aware that this is an additional fee, so you will need to speak to your financial advisor or mortgage broker to understand whether it’s the right thing for you. Depending on your circumstances, you may also be able to get family or loved ones to be guarantor on your home loan.

Bring Your Dream to Life with Brighton Homes

Start making your super work for you – even before you hit retirement age – by using it to fund your dream new home. At Brighton Homes, we have a huge range of incredible designs to choose from, and our partnership with MyChoice Home Loans will put you in the best lending position by working with the experts. You can even use their Borrowing Power Calculator to understand exactly where you are on the journey towards home ownership.