The First Home Super Saving Scheme (FHSSS) proposed by the government in this year’s Federal Budget offers a tax-advantaged way to save for a first home, but there are a number of questions still to be answered, says Lindzi Caputo, wealth management manager at HLB Mann Judd Sydney.
“The FHSSS was certainly one of the more attention-grabbing proposals in the Budget this year but whether it will achieve its aims is open to debate.
“The idea of the proposal is that it will help first home buyers save up for a deposit by taking advantage of the lower taxed superannuation regime, as well as allowing them to benefit from the deemed earnings generated by the super fund.
“If the proposal is passed, people will be able make voluntary contributions of up to $15,000 per year to their superannuation fund which they can then withdraw in order to help buy a first home.
“It will be interesting to see how this scheme will operate in practice and how quickly first home savers will be able to access the funds for their deposit.
“For instance, one key question is how super funds will honour deemed earnings. Investment earnings can’t be guaranteed so how will the deemed earnings be funded in years when the fund doesn’t generate returns above the rate used?
“Another question is how quickly super funds will be able to release the money for practical purposes. With a house auction, funds for the deposit are required on the same day as the offer while for a sales process the exchange cannot occur until the deposit is received.
“Another concern is how this scheme will operate for couples where one partner is a first home buyer and the other is not.
“In addition, the reality is that the amount that can be saved through the scheme alone won’t accumulate enough for most home deposits in major cities.
“Nonetheless, the discipline of sacrificing regular amounts to superannuation could be a way for younger people to engage with their superannuation. And the deposit would tick away over time.
“It is likely that people will need a multi-strategy approach and should consider employing other savings strategies in conjunction with the FHSSS to accumulate a meaningful deposit,” Ms Caputo said.
Ms Caputo used the example of Sarah, who is looking to buy her first home in the next few years.
Sarah earns $70,000 a year and decides to set up a salary sacrifice arrangement to superannuation from her pre-tax income, of $10,000 a year over three years, under the FHSSS.
This would reduce Sarah’s take-home pay by $6,450 a year, or $538 a month. However this strategy would also provide an annual tax saving of $2,050 – that is, a personal tax saving of $3,550 less $1,500 tax on the contribution.
Taking into account the deemed earnings and tax on withdrawal this equates to a total saving of $6,210 over the three year scenario. This tax saving is calculated in comparison to the outcome if Sarah had decided not to use the FHSSS and instead invested after-tax income of $10,000 p.a. into a term deposit with an interest rate of two percent p.a. over the three years.
Using the FHSSS, in the first year, Sarah’s savings would increase by $8,500 (that is, her $10,000 contribution less tax of $1,500) after the 15 percent contributions tax is paid. Furthermore, this contribution would accrue deemed earnings at the current rate of 4.78 percent p.a. less income tax at the super rate of 15 percent.
At the end of year one Sarah would have $8,212 available for a first home purchase, after taking into account tax on the withdrawal at her marginal tax rate less a 30% tax offset.
If Sarah were to continue making salary sacrifice contributions for another two years, by 30 June 2020 she would have $25,892 available to purchase a first home.
Note, the higher the marginal tax rate, the better the tax saving associated with using the FHSSS.
With the $25,892 saved through FHSSS, Sarah would have a five percent deposit on a property worth $500,000.
If Sarah had a partner who was also eligible for the FHSSS and employed the same three year strategy, together they would have $51,784 to purchase a first home. This would represent a 10 percent deposit on the $500,000 property.
“While this is a good result, it is unlikely to meet the minimum deposit requirement and is also short of most bank lending ratios, so further funds from outside of the scheme would be required for the deposit,” says Ms Caputo.