The government’s first home super saver (FHSS) scheme is no silver bullet for housing affordability, but the tax savings on offer are not to be sneezed at either.
Just like saving for retirement, a home deposit requires making the most of all the available opportunities, including tax savings. With some discipline and patience, any incremental savings will enjoy the benefits of compound interest and slowly grow into a respectable sum.
The FHSS scheme essentially operates to provide a 15% tax saving on money channeled via superannuation for a first home purchase. However, the various potential taxing points under the scheme mean that each individual needs to model the possible outcomes for their personal circumstances.
Legislation to implement the FHSS scheme was introduced on 7 September 2017. The measure was originally announced in the 2017-18 Budget. Full details are reported in Thomson Reuters Weekly Tax Bulletin (Issue 38 – 8 September 2017). Sign up for a special free trial of Weekly Tax Bulletin here.
What’s on offer under FHSS scheme?
First home buyers will be permitted to make voluntary contributions to their super fund up to $15,000 per year (and $30,000 in total), to later be withdrawn for a first home deposit, starting from 1 July 2018. Employees will be able to take advantage of salary sacrifice arrangements to make pre-tax concessional contributions. However, the total concessional contributions, including Super Guarantee and those under the scheme, cannot exceed the concessional cap of $25,000 per year.
Importantly, the measure does not allow first home savers to withdraw existing super savings or compulsory Super Guarantee contributions – only future voluntary contributions from 1 July 2017 are eligible.
Withdrawals of FHSS amounts (and associated earnings) will be allowed from 1 July 2018 onwards and taxed at marginal rates less a 30% offset. Note that the original contribution would have also been subject to the 15% contributions tax on its way into the fund.
For example, a taxpayer on the 32.5% marginal tax rate (with income between $37,000 and $87,000) could achieve a respectable tax benefit. They save 17.5% in tax (plus Medicare levy) for the contribution on its way into the super fund, and would only pay 2.5% (plus Medicare levy) on the FHSS released amount.
Eligibility for scheme
- A person must be 18 years or over, have not used the FHSS scheme before and never owned real property in Australia.
- A person will have 12 months after releasing the amount to sign a contract to purchase residential premises (including vacant land to be built and occupied as a residence).
- A person must occupy the premises as soon as practicable, and for at least 6 months of the first 12 months after it is practicable to do so.
- If a person does not buy a home they will be required to re-contribute the amount or pay an additional 20% FHSS tax.
It is also important to remember that a superannuation account is not a capital-guaranteed bank account. This means that careful consideration must be given to the super fund’s investment strategy while a person is saving for a deposit via their super account.
Further details on the first home super scheme, and other wealth creation strategies, are set out Thomson Reuters Australian Financial Planning Handbook 2017-18 – pre-order here.