Can you use super to buy a house?

Property ownership and super are generally Australians’ two largest assets. So, is it possible for the two to work together and help first time buyers trying to get a foot onto the property ladder or established owners upsize to a larger home?

Super is specifically designed to help you save for your retirement during your working life through contributions from you and your employer. When you’re younger, the important rules for super cover how much you can put in and withdraw, with a focus is on ensuring it’s invested appropriately to create steady growth over time. So, can you use super to buy a house?

Well, there are strict restrictions on making withdrawals before you retire, which mean you can only access your super early for three reasons.

  1. Severe financial hardship.
  2. Compassionate grounds.
  3. Impacted financially by COVID-19 – a temporary withdrawal rule.

First home buyers

In May 2017, the Government provided first home buyers with an alternate way to use their super before retirement. The First Home Super Saver Scheme (FHSSS) allows first home buyers to use super to buy a house, by saving for a deposit in a tax-effective environment.

First Home Super Saver Scheme

The FHSSS allows you to make voluntary super contributions of up to $15,000 a year, or a maximum of $30,000 in total, to your superannuation to use towards a deposit for your first home.

All contributions for the FHSSS must be voluntary contributions, so you can’t include Superannuation Guarantee (SG) amounts paid by your employer as part of your deposit. The voluntary contributions you make under this scheme must also be within the existing contribution caps (2020/21 financial year).

  • $25,000 concessional contributions 
  • $100,000 non-concessional contributions

When you’re ready to buy your first home, you can use the money you’ve voluntarily contributed, plus any investment earnings, towards your deposit.

The Government estimates that for most people, the FHSSS could boost their deposit savings by at least 30% compared to saving in a standard deposit account1. This is due to both the concessional tax treatment of super and historically low interest rates on most deposit accounts compared to the deemed interest rate that is on FHSSS contributions2.

In certain circumstances, if you suffer from financial hardship, you may also be able to access the FHSSS and use super to buy a house, even if you have previously owned a home.

Accessing your contributions

The scheme is overseen by the Australian Taxation Office (ATO). When you’re ready to purchase your new home, contact the ATO, who will assess your eligibility and calculate the deemed earnings on your contributions2. The ATO will let your super fund know how much of your super they can release to you and any tax considerations you need to be aware of. You can read more about this process on the ATO website.

If you’re going to use the FHSSS, it’s important to plan ahead. You must apply for and receive an FHSSS determination from the ATO before you sign a property contract or apply for the release of your FHSSS amounts. Once the money is released from your super account, you then have 12 months to either purchase a property or recontribute this money back into your super account.

Early release due to COVID-19

What about existing homeowners – can they use super to buy a house?

When the Government announced a temporary measure allowing individuals to access up to $20,000 of their super (across 2019/20 and 2020/21) due to the economic impact of COVID-19, many looked at this as a possible solution.

However, it was never the Government’s intention that this money should be used to purchase property. Any money released from super should be to help you to deal with the adverse economic effects of COVID-19 and you must satisfy one or more of the following conditions to be eligible for the early release3.

  • You’re unemployed.
  • You’re receiving a JobSeeker payment, Youth Allowance, Parenting Payment, special benefit or Farm Household Allowance.
  • On or after 1 January 2020:
    • You were made redundant or your working hours were reduced by 20% or more.
    • You’re a sole trader and your business was suspended or your turnover has reduced by 20% or more.

And while it’s true that your super is your money, it pays to remember the purpose of super – a tax-effective way to save for your retirement. So, any withdrawals you make before you’re ready to retire will likely result in a shortfall later. For example, research by SuperRatings estimates a 25-year-old who withdraws $20,000 from their super over the next 12 months could be reducing their final super balance at retirement by a staggering $58,0003.

Have the right intention

When considering accessing your super early, it’s a good idea to seek financial advice. Not only are you potentially putting your retirement income at risk, but if you withdraw from your super early and then later recontribute that amount back into your super fund, you may find yourself with additional tax implications4.

  • Excess contributions tax – if you exceed your concessional or non-concessional contributions cap.
  • Contributions tax – concessional contributions made to your super fund are taxed at the 15% rate by your fund impacting your eligibility for a super co-contribution.
  • Division 293 tax – additional tax due to your level of income and personal super contributions.

You can read more about tax and super on the ATO website.

Your super, your money

The FHSSS is currently the only scheme purposely designed so you can use super to buy a house. And you can use any super account, including a BT Super account, to help you save for a home deposit as part of this strategy.

Withdrawing from your super account under other circumstances comes with a degree of long-term risk, and unless you’re facing real financial hardship, it’s worth exploring other sources of emergency funds first.

 

References:

1 2017 Federal Government Budget Speech
2 The amount of earnings that can be realised will be calculated using a deemed rate of return based on the 90 day Bank Bill rate plus three percentage points (as per the Shortfall Interest Charge).
3 https://www.superguide.com.au/how-super-works/early-release-of-super-covid-19-coronavirus
4 https://www.ato.gov.au/Individuals/Super/In-detail/Withdrawing-and-using-your-super/COVID-19-early-release-of-super---integrity-and-compliance/

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The article was prepared by BT, a part of Westpac Banking Corporation ABN 33 007 457 141, AFSL and Australian Credit Licence 233714.

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This information provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such. Superannuation is a means of saving for retirement, which is, in part, compulsory. The government has placed restrictions on when you can access your investment held in superannuation.

The Government has set caps on the amount of money that you can add to superannuation each year on both a concessional and non-concessional tax basis. There will be tax consequences if you breach these caps. For more detail, speak with a financial adviser or visit the ATO website.

Any tax considerations outlined above are general statements, based on an interpretation of the current tax law, and do not constitute tax advice. The tax implications can impact individual situations differently and you should seek specific tax advice from a registered tax agent or registered tax (financial) adviser.

This information may contain material provided directly by third parties and is given in good faith and has been derived from sources believed to be accurate at its issue date. It should not be considered a comprehensive statement on any matter nor relied upon as such. While such material is published with necessary permission, no company in the Westpac Group accepts responsibility for the accuracy or completeness of, or endorses any such material. Except where contrary to law, we intend by this notice to exclude liability for this material.