From 1 July 2017 (start of 2017/2018 year), eligible Australians are able to make voluntary superannuation contributions of up to $15,000 a year, and a maximum of $30,000 over more than one year, to their superannuation account for the purposes of purchasing a first home. And from 1 July 2018, eligible Australians will be able to apply to their super funds to release these contributions (and associated earnings) for the purposes of purchasing a first home.
The voluntary super contributions can be concessional (before-tax) contributions, or non-concessional (after-tax) contributions. If you plan to make voluntary concessional (before-tax) contributions, you will need to arrange with your employer to salary sacrifice super contributions, or claim the super contributions as a tax deduction in your income tax return).
Background: In the 2017 Federal Budget (announced on 9 May 2017), the government promised to help “Australians boost their savings for their first home by allowing them to build a deposit inside superannuation”. The First Home Super Saver Scheme became law on 13 December 2017.
For a moment, let’s ignore the fact that the Liberal government killed off the previous, and more generous, First Home Saver Account in May 2014. Instead, I will explain why the Liberal government thinks the new scheme “will assist first home buyers to save a deposit for their home faster”.
You may ask, why would you save for a house in this way?
Let’s assume you make a concessional (before-tax) contribution. According to the government, the super contributions will be taxed at 15% rather than your marginal tax rate (assuming you pay more than 15 cents in the dollar tax), and any investment earnings on those super contributions once the money reaches your super account are also subject to 15% tax. At the time you withdraw your savings, which must be from 1 July 2018 at the earliest, those savings will be taxed at your marginal tax rates less a 30% tax offset.
Alternatively, if you choose to make non-concessional (after-tax) contributions, then your savings would still benefit from a 15% tax on earnings, but no tax would be deducted from the contributions, and no tax would be deducted from the contributions, although presumably some tax would be payable on the earnings amount when withdrawn.
Just to complicate the scenario further, your super contributions that have been made for the purposes of your home deposit don’t generate real investment returns. Instead, the amount of earnings “that can be released 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)”.
Are you still with me? Let me use an example, perhaps the example the government provides, to explain how this First Home Super Saver Scheme (FHSSS) will make it easier to save for a deposit. See extract below.
Example: Boosting Michelle and Nick’s first home deposit
Michelle earns $60,000 a year and wants to buy her first home. Using salary sacrifice, she annually directs $10,000 of pre-tax income into her superannuation account, increasing her balance by $8,500 after the contributions tax has been paid by her fund. After three years, she is able to withdraw $27,380 of contributions and deemed earnings on those contributions. Her withdrawal is taxed at her marginal rate (including Medicare levy) less a 30 per cent offset. Michelle has saved around $6,240 more for a deposit than if she had saved in a standard deposit account.
Michelle’s partner Nick has the same income and also salary sacrifices $10,000 annually to superannuation over the same period. Together they have $51,520 that they can put towards a deposit, $12,480 more than if they had saved in a standard deposit account.
Note: The ATO is administering the FHSSS, and it will be the ATO that determines whether a person is eligible to withdraw the savings, determines the value of contributions to be released by the super fund, and the ATO will also instruct the super fund to make the payments. Presumably, there will be some check in place to ensure the individual actually uses the withdrawn savings for a home purchase. You have up to 12 months to sign a contract for the purchase or construction of your first home.
Still not convinced? Well, the government has created an online estimator to help you understand “advantages of saving for a home deposit through superannuation”. You can access the estimator by clicking here.
For a more detailed explanation of the rules applicable to the First Home Super Save Scheme, see SuperGuide article 10-point guide to First Home Super Saver Scheme.
Why I think the First Home Super Saver Scheme will be a fizzer
A more generous First Home Saver Account, involving tax-free handouts from the government, was introduced way back in 2008, and it flopped because it was too complicated, too restrictive and apparently first-home buyers did not want to risk locking their money away until retirement if they did not satisfy the eligibility requirements at a later date.
The current version, that is, the FHSSS, is less generous, and a lot of hassle and you can only contribute $30,000, while the previous version you could amass up to $90,000 in your home account. I am certain there will be some Australians who will make the effort to use the scheme, but I expect most first home buyers will think, ‘what’s the point?’.
The previous scheme also faced the obstacle that super funds were not keen to offer such accounts, and I expect that the new FHSSS will face the same obstacle. Why would a super fund offer a FHSSS if they have to guarantee a deemed investment return on the money contributed?
When the previous First Home Saver Account scheme was first announced in 2008, you would have expected a stampede considering the Government was offering tax-free handouts to help first home-buyers purchase a place to live. Not so, because the First Home Saver Account was one of the most complicated and restrictive schemes in the country. While state and federal governments were throwing virtually unconditional cash at first home-buyers in the form of grants and bonuses during 2008, 2009 and beyond, the original version of the First Home Savers Account (FHSA) required you to wait four years before you could a buy a house. If you chose not to wait, then your hard-saved cash in your FHSA was redirected to your superannuation savings rather than your mortgage.
Despite the otherwise generous nature of the previous FHSA (I explain the details later in the article), the risk of losing access to your money until you retired was a risk many young people were not willing to take. From a standing start in October 2008, the scheme was intended to accumulate billions in savings for first-home buyers but such an outcome never eventuated — as at March 2014 only 46,000 FHSAs were open, and total account balances were sitting at $537.4 million, which indicated an average account balance of $11,683.
In defence of the FHSA, the commencement of the scheme did coincide with the Global Financial Crisis, accompanied by a rapid drop in interest rates and a rash of grants and bonuses by state and federal government triggering a rush to buy and build first homes.
Waiting four years for what the FHSA had to offer — some tax-free investment earnings, and a few hundred dollars each year in tax-free money — didn’t seem as compelling as: a temporary drop in house prices (improving affordability), record-low interest rates and tens of thousands of dollars in free cash right now. (Clearly, we are in a different environment in 2017 and 2018, with rising house prices). In the May 2010 Federal Budget, the government announced that where an individual buys a house before the four years is up, the money accumulating in the FHSA could be paid into the individual’s mortgage (that is, an approved mortgage) after the four years has passed, rather than redirecting the savings to the individual’s super account. This change in the rules did not apply to houses purchased before the changes become law.
I believe the modification to the rules remained a deterrent for many first-home buyers who may not have wanted to lock their savings away for four years (even with the cash bonuses associated with the FHSA), when those savings could be put towards a deposit in, say, a year’s time.
Confused? I’ve read the material on the FHSA scheme several times and it still gives me a headache, but if you were willing to follow the rules, the FHSA was a helping hand for you, your children or your grandchildren in pursuing the Australian dream of a first home.
How did the previous FHSA scheme operate?
Under the old scheme, a First Home Saver Account was a special super or bank account that received tax concessions, and was also eligible for a government co-contribution, subject to meeting strict conditions. If you met these conditions, you could withdraw the money held in such an account to put towards your first home. The main features of the previous scheme are listed below:
- Special account.You open a FHSA within selected superannuation funds (in theory), and via special bank accounts. Another problem with the scheme is that not many super funds or financial organisations offer FHSAs. No super funds offer a FHSA, while only 17 banks or other financial institutions currently offer FHSAs. For a list of organisations that offered FHSAs, click on this link.
- Must be over 18 and under 65.
- You must have never lived in a home that you own. You can own an investment property, subject to not having lived in the property.
- Minimum $1000 after-tax contribution.You (or one of your family members if they want to help you out) must deposit at least $1,000 per year into the account in at least four financial years (they don’t have to be consecutive years) before you can access the funds for the purpose of buying a home. Note that this contribution does not count towards your superannuation contributions caps.
- Indexed lifetime maximum of $90,000 (for 2013/2014 year).The maximum that can be contributed to the account over the lifetime of the account is $90,000. This limit was to be indexed in $5,000 increments. Note that this account balance cap also includes fund earnings and the government contributions – what a con!
- A 17% tax-free contribution. For every dollar that you contributed, the Government made a tax-free 17% co-contribution, with the last government co-contribution taking place for the 2013/2014 year only. For example, if you contributed $1,000 to your FHSA, then the Government contributed $170 (17%) — an immediate return of 17% plus earnings on your savings balance. The co-contribution could be as much as $1,020 a year, if you chose to make an after-tax contribution of $6,000. Note that this co-contribution is a different scheme to the superannuation co-contribution scheme.
- Concessional tax rate of 15%.The tax rate on earnings derived from the FHSA was 15% which is attractive if you’re paying more than 15 cents in the dollar, but not so attractive if you pay less than 15% income tax on your personal income.
- Tax-free withdrawals. Unlike your super account, you didn’t pay tax on the amount that you withdrew from your FHSA when withdrawing cash before you turn 60.
- Not available via SMSFs. You could not offer such an account within a self-managed super fund.
- Unlikely to be invested in long-term assets. Since the cash can be withdrawn within four years, the savings were unlikely to be invested in long-term growth assets, which meant that investment returns may not necessarily be that high. I understand that most FHSAs on offer were invested in cash.
From 1 July 2015, all FHSAs reverted to normal bank accounts and from that date there were no restrictions on accessing the cash in those accounts.