- 1. Financial limits on how much you can save
- 2. Withdrawals available since 1 July 2018
- 3. Each person has an annual FHSS contribution limit, and annual maximum savings limit
- 4. Concessional (before-tax) contributions will be taxed
- 5. Tax is payable on the way out too
- 6. Investment returns are deemed by the ATO, rather than based on actual performance
- 7. Your super funds are not in charge
- 8. The tax man will be watching
- 9. Buying a property with someone else
- 10. Withdrawals won’t reduce social security entitlements
- For more information…
Saving a deposit to buy your first home is a tough task, and purchasing an affordable first home can be an even greater challenge. In response to this affordability issue, the federal government announced in the May 2017 Federal Budget, a new scheme to allow first homebuyers to use their super account to save some of the money they need for a home deposit.
The First Home Super Saver (FHSS) Scheme is now law and eligible Australians have been able to make super contributions since 1 July 2017 (from the start of the 2017/2018 year). Since 1 July 2018, any super contributions made to a super account under the FHSS can be accessed to direct towards the purchase of a first home, subject to other eligibility rules.
According to the federal government, the FHSS will help eligible Australians boost their savings for a home by allowing them to save part of their deposit inside the lower-taxed environment of the superannuation system. Note, the new scheme is definitely not for everyone.
To help readers get their head around whether or not the FHSS is a useful policy for eligible Australians to save part of their home deposit, SuperGuide has taken a closer look at the details of the new proposal.
Important: The FHSS was announced as part of the 2017/2018 Federal Budget (May 2017 Federal Budget) and the scheme became law on 13 December 2017.
Set out below are 10 important facts you need to know about the new First Home Super Saver (FHSS) Scheme.
1. Financial limits on how much you can save
The maximum amount you can contribute to super for a home deposit, using the FHSS, is $30,000 and any super contributions you make must be within your annual contributions caps. The total of your super contributions, including the contributions made under the FHSS, must be within the normal annual limits or caps for concessional (before tax) or non-concessional (after-tax) super contributions. For the 2018/2019 financial year, the annual contributions caps are:
- Concessional (before tax) contributions cap: $25,000
- Non-concessional (after-tax) contributions cap: $100,000
Note: The 2017/2018 year contributions caps were the same as the 2018/2019 year.
The maximum amount you can contribute annually to your super account under the FHSS is $15,000, and all contributions counted towards the scheme must be voluntary contributions. The Superannuation Guarantee (SG) amounts paid by your employer cannot be directed towards your FHSS savings.
Note: You can make FHSS contributions using a salary sacrifice arrangement with your employer, or you can make tax-deductible super contributions. Alternatively, you can make non-concessional (after-tax) contributions to your super account under the FHSS.
2. Withdrawals available since 1 July 2018
Any voluntary contributions made into your super account, under the FHSS, cannot be withdrawn until 1 July 2018, at the earliest, and the ATO has indicated it will take 12 business days to process any request.
Eligibility for the FHSS requires you to have not previously owned a home, OR you have previously owned a home, and the Commissioner of Taxation determines you have suffered financial hardship and should be eligible for the FHSS. You can find out more about the financial hardship provisions by referring to the special ATO form (click here to access the financial hardship form).
You must also intend to live in the property you purchase as soon as practicable after buying.
Note: You must be at least 18 years of age to apply for the release of your super contributions under the FHSS.
3. Each person has an annual FHSS contribution limit, and annual maximum savings limit
Rules and limits for the FHSS apply to an individual, which means both members of a couple planning to buy their first home are eligible to use the scheme to save for a home deposit. The maximum a person can contribute each year under the FHSS is $15,000, and the maximum a person can save in total under the FHSS is $30,000. The individual-based limits will give couples the chance to save up to $60,000 using the scheme.
4. Concessional (before-tax) contributions will be taxed
Under the FHSS, you can make before-tax contributions or after-tax contributions to your super account under the FHSS.
If FHSS contributions are made using a salary sacrifice arrangement or as tax-deductible super contributions, the contribution is made from pre-tax earnings, which means the super fund will levy a 15% contributions tax on the super contributions.
For many people, this 15% tax rate on the concessional (before-tax) super contributions will be lower than the normal marginal tax rate they pay on their taxable income. Australians earning lower incomes, and paying the lowest tax rates, need to think carefully about whether or not saving for their deposit using super is the right path to follow.
Note: Non-concessional (after-tax) contributions in the FHSS will not be reduced by contributions tax because those super contributions are from after-tax or non-taxed sources, prior to entering the super system.
5. Tax is payable on the way out too
Like most super savings (unless you retire on or after the age of 60), there is a tax bill to pay when you withdraw concessional (before tax) contributions made into the FHSS.
Release of your contributions and deemed earnings made under the FHSS, will be taxed at your marginal tax rate less a 30% tax offset. For example, if your marginal tax rate is 34.5% including the Medicare Levy, with the 30% tax offset you will pay a tax rate of 4.5% on withdrawal.
Note: The associated earnings applicable to non-concessional (after-tax) contributions made under the FHSS, will also be taxed in a similar way.
6. Investment returns are deemed by the ATO, rather than based on actual performance
The earnings on your FHSS savings will be deemed, using a formula calculated by the ATO. Under the scheme rules, the ATO will consider (or deem) that your contributions have earned a return based on the rate earned by 90-day bank bills plus 3%.
At the time the policy was announced (May 2017), this formula would provide an annual return of 4.78%. It’s important to note that the return on 90-day bank bills moves around in line with trends in investment markets. Note that the volatility in the 90-day bank bill rate means the return deemed on your savings when you withdraw your FHSS contributions may be higher or lower than the May 2017. At the time of writing, the rate is 5.04%.
Note: The return the ATO deems that you earned on your FHSS contributions may be more or less than what you could have earned outside the super system, or more or less than the rate of investment earnings for the balance of your super account. It remains unclear what super funds will do if your super account earns less than the rate deemed by the ATO when you withdraw your contributions. Such a risk may deter some super funds from offering FHSS.
7. Your super funds are not in charge
The ATO – not your super fund – will decide what counts towards the FHSS. The ATO will calculate the amount you contribute as part of the FHSS and the amount those contributions are deemed to have earned. The ATO will advise your super fund on the amount that can be released when you submit an application to withdraw your deposit savings.
The ATO will not require proof of a home purchase before allowing release, but once the ATO does release your contributions, you must purchase your home within 12 months, or sign a contract within 12 months to build a house. If this does not happen, you can apply for an extension of up to 12 months, or recontribute the amount to your super fund, or use the money for other purposes and pay additional tax.
8. The tax man will be watching
The ATO is in charge of ensuring any money withdrawn from your super fund under the FHSSS is used to buy a home, although how this monitoring role will be done remains relatively unclear.
According to the ATO, if you don’t notify the ATO that you have signed a contract to purchase a home, or signed a contract to build a home, or you have not recontributed the amount to your super account, then the ATO will automatically hit you with FHSS tax (20% tax on your assessable released FSSS amounts).
Note: If you change your mind and decide not to buy a first home, your savings under the FHSS will stay locked up in the super system until you retire. Alternatively, it appears you could also choose to apply for a release of your contributions but then be hit with the FHSS tax (refer previous paragraph), but this approach will need to be confirmed by the ATO.
9. Buying a property with someone else
Accessing your FHSS money for a deposit, or payment towards settlement, is a possibility even if you marry someone who is not a first homebuyer and you want to buy your new family home in both names. FHSS is assessed per individual, even if the money goes towards a house that is also purchased by a person who has previously owned a home.
Note: Individual assessment for FHSS eligibility means friends or family could potentially purchase a home together with one or more of the owners not being first homebuyers.
Although the concessional part of the money released to a first homebuyer from the FHSS will be included in the person’s total taxable income, the money will not be used for other income tests by the ATO.
This means withdrawals from FHSS are not included in the calculation of any repayments you need to make for HECS/HELP debts, or in the income tests used to calculate social security entitlements such as family tax and child care benefits.
If you are interested in the FHSS, it’s probably worth taking a look at the Government’s online tool to see whether there are advantages in participating. Check out the calculator here.
For more information…
For more information on the new housing and super measures see the following SuperGuide articles: