We start the new year with headlines of “falling house prices”, but even if prices are set to come down and you keep a close eye on your finances, saving a deposit to buy your first home can be difficult. The First Home Super Saver Scheme (FHSSS) – now passed by Parliament – means that you can use superannuation to build your home deposit, and not only if you are buying a first home.
Here is an update on FHSSS and other exemptions from which you could benefit.
The FHSSS allows you to make voluntary superannuation contributions, from 1 July 2017, and later withdraw them, starting from 1 July 2018, to use for a first home deposit.
For many people, the FHSSS effectively operates to provide a 15% tax saving on money channelled via superannuation for a first home purchase. While the potential tax savings of the scheme will only make a small dent in the major funding required for a home purchase, the potential assistance on offer should not be ignored.
A person with assessable income above $52,000 who has the capacity to salary sacrifice the yearly maximum of $15,000 as a FHSSS contribution can achieve a respectable tax benefit, because they will save 17.5% in tax (plus Medicare levy) on the way into super, and only pay 2.5% (plus Medicare levy) on the FHSSS released amount. However, given that people with taxable incomes below $37,000 have a marginal tax rate of 19% (plus Medicare levy), the tax savings of the FHSSS are diminished for these low-income earners. So, the greatest tax benefit of the scheme will be for people earning between $52,000 and $102,000 who can salary sacrifice $15,000 and stay on the 32.5% marginal tax rate (income between $37,000 and $87,000).
Those with an income above $102,000 can achieve a 22% savings in tax (plus Medicare levy) on the way into super, but will pay 7% (plus Medicare levy) on the FHSS released amount.
Extension to those who are suffering “financial hardship”
When the scheme was first proposed it was limited to apply only to first home buyers.
There is now a proposal to extend the scheme to home buyers who the ATO determines are suffering “financial hardship”.
The Government is yet to release regulations that define what constitutes “financial hardship” and we will keep you updated on this.
Individuals are able to contribute up to $15,000 per year (and $30,000 in total) to their super for the purpose of a first home deposit. Employees can use salary sacrifice arrangements to make pre-tax contributions, but you should keep in mind that any FHSSS amounts you contribute will still count towards your yearly concessional contributions cap. The cap from 1 July 2017 is $25,000 – that is, your pre-tax contributions of up to $25,000 (including the mandatory super guarantee and any you make under the FHSSS) will be taxed at a “concessional” rate of 15%. Higher tax rates will apply if you exceed the cap.
Importantly, the scheme doesn’t allow you to withdraw money that you already had in super before 1 July 2017, and any FHSSS amounts you contribute will only be available for release from 1 July 2018.
To be eligible to use the FHSSS you will need to:
- be at least 18 years old;
- have not used the scheme before and have never owned real property in Australia; or
- qualify as someone who has suffered a “financial hardship” (determined by the ATO), as specified by regulations.
If you’re eligible to use the FHSSS, you won’t be disqualified if you are buying a home with someone else (such as your spouse) who isn’t a first home buyer.
How does it work?
When ready to withdraw an FHSSS amount from your super, you will need to apply to the ATO, giving a declaration of your eligibility to buy or build a residence. The ATO will issue a determination and release authority specifying the maximum amount to be withdrawn, then estimate and withhold an amount of tax and release your deposit to you. The maximum withdrawal amount will be 85% of your pre-tax (concessional) contributions. Concessional contribution amounts and associated earnings withdrawn from your super under the FHSSS will count as part of your taxable income, although a 30% tax offset will apply. Amounts released from super under the FHSSS will be excluded from the social security means tests and co-contribution income test.
After the release of your FHSSS amount, you will have 12 months to sign a contract to buy or build residential premises, and 28 days after the contract signing to notify the ATO. Your purchase can include buying vacant land to build on and occupy as your residence. You will need to occupy the residence as soon as is practicable, and for at least six months of the first year after it becomes practicable to do so. For example, if you buy a house-and-land package, you will need to occupy the house for at least six months in the first 12 months after it is built.
If you’re saving for your first home and think the FHSSS might be for you, there are a range of factors to consider.
A super account isn’t a capital-guaranteed bank account, so it’s important to look closely at your fund’s investment strategy and be aware of the risks involved with adding the money for your home purchase to your superannuation.
It is crucial to plan ahead, as any salary sacrificing to your super will need to be prospective. The various potential taxing points in the scheme also mean that your personal finances and circumstances may affect whether using it to save your deposit would give you a useful tax saving.
Want to know more? Contact us to discuss the latest super changes and your home deposit savings plan.