If you’re struggling to break into the housing market, or you’d like to give your kids or grandkids a head start, the government’s new First Home Super Saver Scheme might give you the edge you’ve been looking for.
We all know skyrocketing house prices have made it harder than ever for home buyers to get a toehold in the Australian property market. Low interest rates may have made home loans more affordable, but they’ve also made it more challenging than ever to save the 10%–20% deposit home buyers need to get started. In markets like Sydney and Melbourne that can mean saving $100,000 or more before you even start house-hunting — leading many to despair of ever finding the money they need to get started.
That’s where a new scheme announced in the 2017 Federal Budget could help. Called the First Home Super Saver Scheme, it allows first home buyers to save for a deposit using their super.
How would saving through super help? Because super allows you to make contributions from your pre-tax salary. These pre-tax super contributions are taxed at just 15%, rather than your normal marginal tax rate. For a worker on today’s average full time salary, with a marginal tax rate of 34.5% (including 2% Medicare levy),1 that could mean adding an extra 19.5% to their savings.
And if you have a child or grandchild preparing to buy their first home, you may be able to use the scheme to help them too, by contributing to super on their behalf.
How does it all work?
Under the scheme, first home buyers will be able to make extra contributions up to $15,000 a year into super to save for a home deposit, up to an overall limit of $30,000 per person. If you’re an employee, you can contribute extra from your pre-tax salary using salary sacrifice, provided your employer offers that option. (Note, however, that the superannuation guarantee contributions your employer makes for you will not count towards this amount — more on that in a moment.)
Alternatively, you can make a personal contribution from your after-tax salary, then claim a tax deduction for that amount. In either case, the extra contributions you make will be subject to a tax rate of 15%. So if your normal tax rate is higher, you come out ahead.
When you’re ready to buy your first home, you’ll be able to withdraw these extra contributions you have made on top of your normal super, plus an additional amount for your earnings on that money while it has been invested. Rather than calculating the actual return on your contributions while they are invested in your super, your fund will use a special “deemed earnings” amount, equal to a standard benchmark interest rate (the 90 day Bank Bill rate) plus a margin of 3% pa. As at 21 June 2017, that would give you a rate of return of 4.78% — higher than most term deposits, but lower than some super fund returns.
You will also need to pay tax on the amount you withdraw, but with the benefit a special 30% tax offset. For most taxpayers, that is likely to mean paying little or no tax on the amount withdrawn.
Contribution caps and after-tax contributions
One important point to note is that these tax-advantaged salary sacrifice and personal contributions all count towards your concessional contributions cap, currently set at $25,000 for the 2017–18 financial year. And they aren’t the only super contributions included in that cap. If you’re an employee, the compulsory super guarantee payments made by your employer also count towards this $25,000 limit — so if you receive more than $10,000 in super from your employer, you may not be able to salary sacrifice the full $15,000 a year allowed under the First Home Super Saver Scheme.
But there is a solution. The scheme will also allow first home buyers to make non-concessional contributions from their after-tax savings. While that won’t give you the same tax benefits as salary sacrifice, it will let you take advantage of the lower tax rate on super returns (also currently 15%) while your money is compounding within the fund.
Non-concessional contributions are also subject to a separate, non-concessional contributions cap, currently set at $100,000 for the 2017–18 financial year, making it easier to invest the full amount allowed each year under the scheme.
Non-concessional contributions could have another benefit too. Under current laws, anyone can make a non-concessional contribution to a super account held by a person under 18, including parents and other family members. So if you’d like to help your child or grandchild get a start in the housing market, it’s likely that you’ll be able to make non-concessional contributions on their behalf, even if they’re a minor or not currently in the workforce.
Is it right for you?
The First Home Super Saver Scheme could be an option worth considering for many first home buyers — but that doesn’t mean it’s right for everyone. Super and tax laws are complex, and everyone’s situation is different, so it’s important to get expert advice on how they could apply to you.
To find out more about the scheme and whether it’s right for your situation, contact us and one of our friendly staff will be in touch to arrange an appointment.
Case study: saving a larger deposit sooner
The problem
Emily is an IT administrator, earning $70,000 a year. Her husband, Mark, is a high school teacher, with a salary of $50,000 per annum. Together, they are looking forward to buying their first home. But while their combined incomes are ample for the loan they will need to buy a two-bedroom townhouse in their area, they are finding it difficult to save a deposit. Meanwhile, they run the risk that prices could rise further, putting a home out of reach.
How the First Home Super Saver Scheme could help
Emily and Mark calculate that they can each save 10% of their income towards a deposit. Together, they decide to use the First Home Super Saver Scheme to kickstart their savings.
The scheme allows them to use salary sacrifice to put money aside from their pre-tax salary, rather than paying tax first. Because they pay tax on those contributions at just 15%, rather than their marginal tax rate of 34.5% (including 2% Medicare levy), they can save 19.5% more upfront. That could help them build a deposit faster.
Here’s how the First Home Super Saver Scheme could help them save:
| Amount saved after tax | |||||
|---|---|---|---|---|---|
| Annual contribution | Using the scheme | Using a standard deposit account | Difference | ||
| Emily | 2017-18 | $7,000 | $5,763 | $4,560 | $1,203 |
| 2018-19 | $7,000 | $11,859 | $9,179 | $2,680 | |
| 2019-20 | $7,000 | $18,151 | $13,823 | $4,328 | |
| 2020-21 | $7,000 | $24,711 | $18,527 | $6,184 | |
| 2021-22 | $2,000 | $27,248 | $20,075 | $7,173 | |
| 2022-23 | $0 | $28,420 | $20,337 | $8,083 | |
| Mark | 2017-18 | $5,000 | $4,090 | $3,220 | $870 |
| 2018-19 | $5,000 | $8,376 | $6,482 | $1,894 | |
| 2019-20 | $5,000 | $12,799 | $9,760 | $3,039 | |
| 2020-21 | $5,000 | $17,479 | $13,078 | $4,401 | |
| 2021-22 | $5,000 | $22,418 | $16,440 | $5,978 | |
| 2022-23 | $5,000 | $27,639 | $19,844 | $7,795 | |
The result
By using the First Home Super Saver Scheme, Emily and Mark could potentially save more than $56,000 in six years — around $15,900 more than with a standard deposit account. That would give them enough for a 10% deposit on a $470,000 home (with Lenders’ Mortgage Insurance), allowing them to get their first foothold in the property market.