How will first home buyers benefit from the super saver scheme
Smashed avo and takeaway coffee comments aside, how effective will the latest Budget’s First Home Super Saver Scheme (FHSSS) be in enabling first time buyers to enter the property market? We look at the benefits and some of the issues to be aware of.
With the end of financial year looming and the dust settling on this year’s budget announcements, the most savvy among us take this time to consider their fiscal position and do some planning for the coming financial year. This year’s budget focus on housing affordability means May is definitely an opportune time for first home buyers to take stock of their options and goals.
While we already outlined many of the budget changes affecting housing affordability earlier this month, we thought it was worth exploring in more detail what the First Home Super Saver Scheme (FHSSS) is and what it’s positive effects may be for those wanting the enter the property market.
As you may be aware from the post-budget media dissection, previous State Government grants for first home buyers have been deemed a disaster and a failure, especially when house prices are high. Why? Because immediately after a Government announces a grant, house prices inevitably increase to factor in the ‘free grant money’ available. Not only do grants make it harder for you to buy a house, it also makes it more difficult for next year’s first home buyers.
How Does the FHSSS Work?
Ordinarily, people pay income tax when they receive income – However, under the FHSSS, first home buyers are able to contribute straight to super from your employer as part of a salary sacrificing arrangement. Self-employed Australians can also make voluntary concessional contributions to superannuation. It should be noted that these contributions are in addition to the regular superannuation guarantee contributions, which are paid quarterly by your employer. These contributions cannot be withdrawn until later in life so they can help fund your retirement.
If the scheme is passed, from 1 July 2017, first home savers can instruct their employers to deposit money from their pre-tax income into their super account, where it will be taxed at just 15 per cent instead of the usual marginal tax rates that would apply, currently at 19, 32, 37 and 45 per cent (plus the Medicare levy).
Check out this estimator to get a better understanding of what your savings would be using annual pre‑tax contributions to superannuation compared to saving the same amount (less tax at personal tax rates) in a standard deposit account.
Earnings generated on this money while in the super account will also be taxed at the low rate of 15 per cent, compared to paying the full whack of marginal tax on interest earned on bank savings.
The scheme maxes out at a total of $30,000 in contributions per individual and the maximum that can be salary sacrificed in any year is $15,000.
When the time comes to live out the great Aussie dream and buy a home, savers will pay tax on their withdrawal amount at their marginal rate, less 30 percentage points. For a person on the 37 cent rate, they pay just 7 cents. That’s not quite the tax-free withdrawals enjoyed by over 60s from super, but it is significant.
What’s the Catch?
The obvious assumption is that the first home buyer has cash to set aside for the FHSSS. While this may be easier for higher income earners and can be used as an effective forced-savings method, low income earners will really need to be aware that this is money that they won’t be able to access at a later date. And generally they are less likely to have spare funds that can be easily set aside. However, even for low income earners, it should be worthwhile, their contributions being essentially tax-free thanks to the low income super tax offset.
A second consideration is the fact that some may not be able to squirrel away as much as they think. The usual caps on concessional contributions to super apply, which from 1 July 2017, means a maximum of $25,000 in contributions a year—both voluntary and compulsory—which attract the low tax rates.
Anyone earning $106,000 or above will already have compulsory contributions of $10,000 and more a year, meaning they can put in less than the scheme maximum of $15,000 a year.
Another catch is that if you earn more than $250,000 you pay an extra 15 cents on your contributions, bringing tax to 30 cents.
The most important thing to be aware of is the fact that once your money is in, it can’t be withdrawn for other purposes. If, for whatever reason, you never end up buying a home, the money has to sit there until you reach retirement age.
The FHSSS allows people to access their funds after a year, which is much more flexible then the scheme suggested in 2008 which held funds for 4 years.
The Australian Taxation Office (ATO) will be administering the FHSSS, and it will determine whether a person is eligible to withdraw the savings and the value of contributions to be released by the super fund. It will also instruct the super fund to make the payments and we assume in some way will ensure that an individual actually uses the withdrawn savings for a home purchase. However, at this stage, it has not been fully explained how this will work.
Applying For the First Home Savers Checklist
- Carefully assess your budget to determine how much you can realistically set aside.
- Use the Budget estimator to help you set a goal.
- Talk to your employer about salary sacrifice after July 1 2017.
- Consider all your options and make sure you plan to actually buy a house before committing to the scheme.
Leading buyer’s agent Cohen Handler can help first home buyers find the right property at the right price. Contact us now.