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 per cent deposit, and in the ideal world you'd have a 20 per cent 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 in December Parliament passed legislation for 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 help you enter the housing market? In short, should you care about this initiative?
The First Home Super Saver Scheme exists to help ensure that entry into the housing market remains possible. So how does it work? 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 July 1, 2018, it is possible to apply to withdraw voluntary contributions made to super after July 1, 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 (concessional) contributions, so for the remainder of this article, I'm going to focus on these. For most people, these 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 about $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 per cent. 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 order to get the maximum out, you'd need to contribute for at least two years.
Also, the normal superannuation contributions limits apply. The most anyone can contribute to super in pre-tax 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 per cent 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 about 30 per cent, and so any tax applicable at withdrawal will be pretty minimal. But of course the scheme is open to anyone, even someone earning 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.
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.
This information is of a general nature only and has been prepared without taking into account your particular financial needs, circumstances and objectives. While every effort has been made to ensure the accuracy of the information, it is not guaranteed. You should obtain professional advice before acting on the information contained in this publication.