Salvaging the Aussie dream
The Aussie dream of home ownership has taken a battering in recent years.
House prices have skyrocketed making it almost impossible for first home buyers to get into the property market.
But the government is doing something to help, in the guise of the First Home Super Saver (FHSS) scheme.
What is the FHSS scheme?
The FHSS scheme allows eligible Australians to boost their savings for a home purchase by saving part of their deposit with pre-tax money inside the lower-taxed environment of their superannuation.
In other words, you make extra contributions into your superannuation account, and then withdraw them, plus earnings, to pay the deposit on a first home.
How does it work?
Since 1 July 2017, you’ve been able to make voluntary concessional (before-tax) and non-concessional (after-tax) contributions into your super fund to save for your first home.
As of 1 July 2018, you can now apply to release your voluntary contributions, along with associated earnings, to help you purchase your first home. The associated earnings are set at the 90 Day Bank Bill rate + 3%, regardless of what your contributions actually earn. Based on current rates, this is about 5%.
The thinking is that you are likely to save on tax as the earnings will be taxed at only 15% inside super, compared to your marginal tax rate outside of super. In addition, the earnings will always be better than if you invested them in a typical savings vehicle like a term deposit.
Your normal superannuation contributions made by your employer are not relevant here – they remain preserved until your retirement. The FHSS scheme only applies to extra contributions that you make.
There are qualifiers around the scheme. Namely, it is for first-time home buyers only.
You can’t already have owned property in Australia – this includes an investment property, and you must either live in the premises you are buying, or intend to as soon as practicable.
You must also live in the property for at least six months of the first 12 months you own it, after it is practical to move in.
You have to be at least 18 years old to apply for a release of amounts under the FHSS scheme. You can only apply for release once.
Rules and limits
The maximum a person can contribute each year under the FHSS scheme is $15,000, and the maximum a person can save in total under the FHSS scheme is $30,000.
The FHSS rules and limits apply to an individual, which means both members of a couple planning to buy their first home can use the scheme to save for a home deposit. This gives couples the chance to save up to $60,000 using the scheme.
The rules also mean siblings or friends can each access their own eligible FHSS contributions to purchase the same property.
If one of the group of buyers has previously owned a home, it won’t stop the others who are eligible from applying.
This means friends or family could potentially purchase a home together with one or more of the owners not being first home buyers.
If FHSS scheme contributions are made using a salary sacrifice arrangement or as tax-deductible super contributions, the contribution is made from pre-tax earnings. This means instead of being taxed at the marginal tax rate that usually applies to your salary, all funds saved through the scheme will only be taxed at 15%.
For many people, this 15% tax rate on the concessional (before-tax) super contributions will be lower than the normal marginal tax rate they pay on their taxable income. When you withdraw the savings at the $30,000 cap, that amount gets taxed at 30% below the marginal tax rate that applies to your income bracket.
It’s important to remember to wait until after your money has been released before you sign the contract to purchase or construct your home or you may be liable to pay FHSS tax – a flat penalty tax.