How Does The First Home Super Saver Scheme Work?
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” – Source Budget 2017-18 Fact Sheet 1.4.
One of the initiatives contained in the budget was the First Home Super Saver Scheme.
From 1 July 2017, it is proposed individuals will be able to make voluntary contributions to superannuation of up to $15,000 per year and $30,000 in total, for the purpose of purchasing a first home. The contributions can be made by either before-tax (concessional contributions) or after-tax money (non-concessional contributions) and must be made within an individual's existing contribution caps. Concessional contributions will incur 15% income tax, and so 85 per cent of the pre-tax contribution will be invested.
From 1 July 2018, onwards, individuals will be able to withdraw these contributions and their associated deemed earnings from the superannuation to fund a first home deposit.
The taxable component of any withdrawals will be taxed at an individual's marginal tax rate, less a 30% tax offset. The taxable component includes concessional contributions and investment returns. However, no tax will be payable on the tax-free component of any withdrawals, as is the case when withdrawing a return of non-concessional contributions.
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 3 per cent.
Withdrawals from superannuation for the purposes of purchasing a first home will not impact the individual’s social security entitlements such as HECS/HELP repayments, family tax benefit or child care benefit.
The Australian Taxation Office (ATO) will be responsible for administering the new First Home Super Saver Scheme and as such will assess eligibility for withdrawing amounts for the purposes of purchasing a first home as well as calculating the amount that can be released. Superannuation funds will need to respond to a release request authorised by the ATO. The ATO will also be responsible for ensuring that individuals actually use the proceeds they have withdrawn from superannuation to purchase their first home.
The following example, adapted from the Government’s Estimator, highlights the potential benefits of the First Home Super Saver Scheme compared to saving via a standard deposit account.
For Robyn earning a taxable income of $70,000 p.a. making annual salary sacrifice contributions of $10,000, her superannuation balance would increase by $8,500 p.a. after contributions tax has been paid by her fund. After three years Robyn could have available $25,892 to put towards a deposit for her first home. This comprises the net contributions and deemed earnings, less tax upon withdrawal. Robyn’s partner may also undertake the same strategy, doubling the amount to put towards their first home.
If Robyn, was to not salary sacrifice to superannuation, but instead pay tax at her marginal tax rate and invest the net amount in a basic deposit account earning 2 per cent p.a.; this would result in a lower net amount available for the deposit by $6,210 after the third year.
The net benefit of undertaking a salary sacrifice strategy increases if the contributions are left in the superannuation environment to accumulate returns over time, as shown in the illustration below. For instance, if Robyn’s contributions were left in her superannuation fund for three years after she made the $30,000 total salary sacrifice contributions, she would have a net withdrawal amount of $29,267, which is $8,808 more than saving outside of superannuation.
Source: First Home Super Saver Scheme – http://budget.gov.au/estimator/
What does this mean for you?
If you or your children are looking to purchase a first home, the First Home Super Saver Scheme could boost the savings for a deposit for a first home by at least 30% compared with saving through a standard deposit savings account.
If the employer offers salary sacrificing, taking advantage of these arrangements to make additional contributions to superannuation to help fund a first home deposit taking advantage of taxation savings. Care should be taken to ensure you do not breach contribution caps.
If you are self-employed, or do not have access to salary sacrificing arrangements through your employer, you may be able to take advantage of this new scheme by making after-tax contributions to and subsequently claiming a tax deduction on these contributions, as will be allowed from 1 July 2017; meaning savings are effectively derived from your before-tax income.
Both members of a couple could take advantage of this new scheme to buy their first home together.
Note: These changes are proposals only and may or may not be made law.
Frank Paul is Head of Advice Services with Spring Financial Group. Frank has over 20 years' experience in financial planning and investment advisory.
|Frank has extensive experience in private client advising and the management of financial services operations. Frank is actively involved in the recruitment and management of advisory personnel and heads the advisory panel. He holds a Master of Commerce (Financial Planning) and a Dip. Financial Planning and has authored literally dozens of financial education publications.|