Smashed Avo for breakfast or buying your First Home? Why not both? In response to the increasing house prices in Australia, parliament has passed new legislation allowing first home buyers to save for their home deposit (residential home) within superannuation.
Saving a deposit to buy your first home can seem unattainable. To be approved for a mortgage banks require a minimum deposit of 5% of the purchase price of your home. To avoid costly mortgage insurance this minimum deposit increases to at least 20%. The First Home Super Saver Scheme (FHSS) is designed to allow first home buyers to save for this deposit within the lower-taxed superannuation system.
So what is the First Home Super Saver scheme? How does the scheme work and should you be considering it? We have touched on a few points below for you to consider..
1. How much can you save under the FHSS scheme?
The FHSS scheme is based around making contributions to your superannuation fund to save for your deposit. Why? Contributions to superannuation are taxed at 15%, which is typically lower than your marginal tax rate, meaning more of your cash is saved and less is going to the ATO.
It is important to be aware that regular contributions made by your employer are not realised under the scheme, only additional contributions you make. These can be either concessional (made before tax) or non-concessional (made after tax) contributions.
The contribution caps that were introduced in the 2016 Federal budget still apply here (read more). However, the maximum amount that can be allocated to the FHSS scheme from these contributions are limited to:
- $15,000 of concessional and non-concessional contributions per financial year beginning 1 July 2017 and
- $30,000 of concessional and non-concessional contributions in total.
2. How do you make a contribution to the FHSS scheme?
You do not need to do anything special, just simply make concessional or non-concessional contributions to your superannuation fund as you usually would. If you have not previously made a contribution your superannuation fund can provide these details to you.
3. If you make Concessional and Non-Concessional contributions which are used first in the FHSS scheme and how are they taxed on release?
Under the scheme it will be assumed that non-concessional contributions were made first. Non-concessional contributions that are released under the scheme will not be included in your assessable income and will not be taxed.
If your non-concessional contributions are less than $15,000 in any one year the remainder can be made up of concessional contributions up to this cap. On top of this amount, you will be able to withdraw associated earnings calculated on these contributions usings a deemed rate of return. This is based on the 90-day bank bill rate plus three percentage points (shortfall interest charge rate).
It is important to note that concessional contributions and associated earnings withdrawn will be included in your assessable income at tax time and taxed at your marginal tax rate minus a 30% non-refundable tax offset.
Sally has made the following contributions in the 2017/18 financial year
- $8,000 of non-concessional contributions
- $4,250 of personal concessional contributions (85% of $5,000)
- $750 of associated earnings on the $12,250
If the ATO releases the maximum amount for Sally of $13,000
- $8,000 will be released tax free
- $5,000 will be added to Sally’s assessable income and taxed at her marginal tax rate minus the 30% tax offset from the FHSS
4. How much will you save using the FHSS scheme compared to if you just put the money in a savings account?
The government has put together an estimator here where you can calculate the potential benefit of using the scheme. This is worth doing – you may be surprised by how much you can save.
5. At what point during the purchase process do you need to release the funds?
When ready to purchase your home you must request that the FHSS funds be released prior to entering into a contract to purchase or construct your first home. Once the funds are released you have 12 months to enter into a contract. It can take some time to release the money by the time it goes from the ATO to the super fund so plan well in advance. No, let me say that again, plan well well in advance.
6. Are my partner and I both eligible to release the full $30,000 or is this combined?
The FHSS scheme rules apply to each person as an individual. Meaning you and your partner can each save $30,000 under the scheme – $60,000 in total.
7. Can I use the FHSS Scheme to purchase an investment property?
No! You must occupy the property as soon as practicable, and for at least six months of the first twelve months.
8. Will I still be eligible for the First Home Owners Grant if I use the FHSS scheme?
Releasing money from superannuation under the FHSS will not disqualify you from receiving the first home owners grant. However eligibility requirements for each of the schemes vary. Just because you are eligible for one does not mean you will be for the other.
Beware, if you release the money and do not buy a home within 12 months you either have to put it back in super or pay a tax penalty of 20% of the amount released from super. Also, there are certain superannuation funds that do not allow these contributions to be withdrawn so once again get advice.
It is here to stay
The government is required to organise an independent review of the scheme after 18 months. With six months to complete the review and publish a report.
This information is the tip of the iceberg. There is much devil which will catch some people out – but also a lot of benefit! To see if this scheme is right for you and to ensure you navigate all the new rules correctly contact your nearest WRS office.
This website contains general advice which does not consider your particular circumstances. You should seek advice from Wealth & Retirement Solutions who can consider if the general advice is right for you. You should also consider the Product Disclosure Statement before making any investment or product decisions. This website contains past performance information. Past performance is not always a reliable indicator of future performance and you should not rely solely on it to make investment decisions.