By Alec Berry, MGD Wealth
With housing affordability becoming increasingly challenging, many first home buyers are trying to best manage their path to the goal of owning property. To assist with these efforts, starting on 1 July 2017 a new initiative was introduced for Australians looking at getting themselves into the property market. This scheme, referred to as the First Home Super Saver (FHSS) Scheme, utilises the tax mitigating environment of superannuation to allow first home buyers to grow a deposit before purchasing their first property.
From 1 July 2017, eligible Australians were able to make additional concessional or non-concessional contributions to participating superannuation funds and starting July 2018, participating members will be permitted to begin releasing these funds.
Are You Eligible?
To qualify for this scheme, participants must:
- Not have previously owned property in Australia;
- Not have previously released funds from superannuation under the FHSS Scheme;
- Intend to live in the property for at least six of the first twelve months of ownership, as soon as practicable; and
- Be aged 18 years or over.
If, however, financial hardship has been suffered (for example due to a relationship breakup) it is possible to apply to the Commissioner of Taxation to receive a concession to one or more of these guidelines.
These contributions can be made either concessionally (pre-tax, via salary sacrifice or a similar scheme) or non-concessionally (after tax), however, the contributions are not in addition to the annual contribution caps – they must still fall within the limits. For the 2017/18 financial year, concessional contributions are capped at $25,000 and non-concessionals are capped at $100,000.
The FHSS scheme allows a maximum value of $30,000 per person to be released from superannuation, with a cap of $15,000 in any single financial year.
If a couple plans to purchase a property and both individuals are eligible, they may potentially have $30,000 each released from superannuation, giving a total of $60,000 for a deposit. This includes couples contributing to a shared self-managed superannuation fund (SMSF), assuming the fund has an appropriately structured deed. Such a deed must provide specific wording allowing FHSS contributions and allowing the funds to be directly released to the Australian Taxation Office (ATO) upon receiving a release authority. Contributions are only eligible to be withdrawn in this scheme if they are voluntary, i.e. above standard Superannuation Guarantee (SG).
Prior to contributing, it should be ensured that the relevant super fund will release the contributions upon request and all relevant fees, charges and insurance implications should be discussed.
Using the superannuation taxation structure, there is the potential to make considerable savings dependent on one’s financial situation. Upon a concessional contribution being made, a heavily reduced tax of 15% will be charged, whilst at withdrawal, the tax will be levied at an individual’s own marginal tax rate less 30% (or 17% if marginal tax can’t be calculated). To illustrate, a member with a marginal tax rate of 37% will only pay tax on their FHSS withdrawals at a rate of 7% (in addition to the 15% paid on the initial concessional contribution). Depending on an individual’s ability to salary sacrifice, this can significantly decrease the tax burden experienced whilst trying to save for a home deposit. For an estimate of how this may work for specific income and contribution levels, the ATO has a calculator that compares this scheme with a person using a 2% p.a. savings account, showing a potential gain in a hypothetical environment.
Things to Remember
To ensure there are no complications during the process, a brief timeline of the steps is as follows. Once a withdrawal is submitted, there is an approximate turnover window of two weeks before funds will be received. Along with the funds, a report of total funds withdrawn and tax withheld will be provided to be included within the Income Tax Return for the year in which the request was received, rather than in the year that the funds are released. It is important to note that FHSS funds will only be included for tax purposes, they will not affect one’s eligibility for social security entitlements or HECS/HELP debts and will not be used in other income tests by the ATO.
Once funds are released, there is a twelve-month window in which a house must either be purchased or constructed. If this does not occur within the allotted period – and no extension is given – the funds can either be recontributed to super or will be taxed at a flat rate of 20%.
Where to Start?
If you are working towards owning your first home and need any assistance building out a financial strategy to achieve this, it is recommended you seek professional advice to ensure that all decisions made are in line with your objectives for the future.
Alec Berry is a Client Adviser of MGD Wealth based in Brisbane, advising clients across a spectrum of services, with a strong focus on wealth accumulation, preservation and protection. For more information, visit www.mgdwealth.com.au.
Disclaimer: This article contains general information only and is not intended to constitute financial product advice. Any information provided or conclusions made, whether express or implied, do not take into account the investment objectives, financial situation and particular needs of an investor. It should not be relied upon as a substitute for professional advice.