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We all know that property prices in Australia have gone stupid in recent years. One significant consequence of that has been that first home buyers have found it increasingly difficult to enter the property market. Banks like to see at least a 10% deposit, and in the ideal world you’d have a 20% deposit to avoid mortgage insurance costs. But when a first home can often cost north of half a million dollars, saving a deposit of that size can be really challenging, especially if you have rent to pay, and perhaps a HECS-HELP debt that sucks away a portion of your income.
Fortunately there has been recognition of this problem by both sides of politics, and the solution that has been legislated in recent months is the First Home Super Saver Scheme.
So what is it, and should the First Home Super Saver Scheme be on your radar as a strategy to enter the housing market? In short, should you care about this new initiative?
It’s always good to start at the beginning, so before we dive in, let’s just consider the objective of the First Home Super Saver Scheme. Home ownership is considered a good thing for the nation. Now as regular listeners and readers will recall, in episode 19 I looked at whether people who simply can’t enter the property market are financially doomed, and the conclusion that we found is certainly not.
However for those that do wish to own their own home, and that is most of us, the rationale is sound. Owning the roof over your head gives you long term financial security. Sure, you’ll have a mortgage to repay for many years, but one day this will be paid off, and so in your later years, you’ll have your housing needs covered for relatively little ongoing expense. This makes retirement that much more affordable, and also provides you with the security of knowing you can remain in your community without disruption.
Building equity in your home may also enable you to finance things like starting a business, and provide funds for Aged Care needs towards the end of your life if needed.
Home ownership also tends to align with a sense of equality. I enjoy reading about the period around the French Revolution, in the late 1700’s. In that era (and it was much the same throughout Europe and England), the wealthy few owned everything, and the vast majority eked out a living as best they could. In that type of society, the average person had little control over their life, and got blown about by the whims of the wealthy elite, with their wars and ridiculous extravagances.
Australians have always resisted a society like this. The concept of a fair go is ingrained in us. And whilst in recent years it feels like perhaps we’ve headed a bit more towards the wealth of the nation becoming concentrated in fewer hands, the ability to access home ownership for all Australians is a really important foundation stone of our society.
So the First Home Super Saver Scheme exists to help ensure that entry into the housing market remains possible.
So how does it work? Now I need to give a jargon alert here. I always try very hard to not use financial jargon when I write pieces for Financial Autonomy. But because the First Home Super Saver Scheme feeds into the superannuation system, and because Australia’s superannuation system is almost a language all of its own, I won’t be able to avoid having some jargon in this post. I’ll do my best to explain things in what I hope are easily understood terms, but if anything is unclear, don’t hesitate to drop me an email to clarify.
The First Home Super Saver Scheme enables you to make extra contributions into your superannuation account, and then withdraw them, plus the earnings, for the purposes of a first home deposit. It’s rational because you are likely to save on tax, and typically the earnings on savings in a super fund will be better than what you would generate with a bank deposit.
From 1 July 2018 it is possible to apply to withdraw voluntary contributions made to super after 1 July 2017 for a first home deposit.
Voluntary contributions includes both pre-tax (salary sacrifice) and after tax contributions. Your normal superannuation contributions made by your employer are not relevant here – they remain preserved until your retirement. The First Home Super Saver Scheme only applies to extra contributions that you make.
The primary benefit exists for pre-tax contributions, so for the remainder of this post, I’m going to focus on these. Now the jargon term here is “concessional contributions”. They are concessional because these type of contributions receive special discounted tax rates. For most people, concessional contributions occur via salary sacrificing to super. That is, you arrange with your employer to have an amount taken out of your wage before tax is calculated, and that money is sent to your super fund, on top of the normal employer contribution that they would be making.
Now if you’re self-employed, it’s even easier, as it’s probable that any contribution to super that you make will be concessional. If your taxable income is quite low, this may not be the case, so get some advice here if that’s applicable.
Because the money you’re sending to super comes out before tax, you’ll find that the impact on your pay packet is less than you would expect. So for instance if you were on a wage of $70,000, and you salary sacrificed $500 to super, your take home pay would reduce by around $350, not the full $500 amount.
This points to why the First Home Super Saver Scheme makes sense. It’s all about the tax!
When your salary sacrifice contribution arrives at your super fund, it will be taxed at 15%. So taking the $500 example earlier, after tax is deducted $425 hits your super fund. But as mentioned earlier, had you instead taken this money as normal take home pay, you would have only got $350 in your pocket, so $425 going into your super fund is a good win.
Let’s look at some of the parameters around the scheme.
Firstly, the maximum that you can withdraw from the scheme is $30,000 plus the earnings on those funds.
The maximum amount that you can have released from a single years contributions is $15,000. So in other words, in order to get the maximum out, you’d need to contribute for at least 2 years.
Also, the normal superannuation contributions limits apply. The most anyone can contribute to super in pre-tax/concessional contributions is $25,000, and this includes what your employer puts in. So you might want to save $15,000 in a particular year into super to use in this new scheme, but if your employer already puts in more than $10,000, then you simply don’t have the head room within the contribution caps to be able to do this.
When you then withdraw these savings, they will be taxed at your marginal tax rate, less a 30% tax offset. This bit is confusing at first blush and will catch some people by surprise. It exists to provide equity in the scheme. Most people with access to this scheme will pay tax at around 30%, and so any tax applicable at withdrawal will be pretty minimal. But of course the scheme is open to anyone, even someone earnings several hundred thousand dollars a year, so this mechanism is designed to ensure that higher income earners don’t get a disproportionate benefit from the scheme.
I guess the takeaway is just to recognise that when you withdraw, it may be that some tax is deducted. Rest assured though that where this is the case, you will still have been better off than had you saved the equivalent amount outside of the scheme, assuming earnings rates were the same.
It’s also worth noting that you don’t need a new or separate super account for this scheme, nor do you need to tell your super fund that the contributions you are making are for this purpose.
The actual mechanism for withdrawing your funds is a little unclear at this point as it hasn’t happened yet. The tax office is responsible for approving the withdrawal. So either you will apply to the ATO to withdraw the funds, and then when they are satisfied that you are eligible, they will send instructions to your super fund to release the money, OR you will apply to your super fund, who will then go to the ATO for approval to release the money. The process will become clear later this year once it becomes relevant.
The contribution limits apply to an individual, so couples will be able to get twice the benefit if they have the capacity to contribute.
Also, it’s probably stating the obvious, but this scheme works by saving you tax. If you don’t pay any tax, or very little, then there’s likely to be little benefit in the First Home Super Saver Scheme for you. As a rough guide, I’d imagine it would only be relevant for those earning at least $30,000 per year.
So should you care about the First Home Super Saver Scheme? Well if you’re trying to save a deposit for a home, and earn more than $30,000 per year, then I would say yes. You will save on tax, relative to building up your savings in a normal bank account or investment, and that means more funds available for your first home deposit. The government estimates the scheme will cost the budget $250million in forgone tax revenue over 4 years. So for those who can use it, why not claim your fair share of that booty?
In the toolkit for this episode, we’ve summarised the key elements of the First Home Super Saver Scheme and we have a link to a great calculator that will tell you the gain to be made depending on what your income is, and how much you salary sacrifice. It tells you the per year benefit and the result over 3 years of saving. It’s really easy to use and it’s great to really quantify the value of this strategy.
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