To help reduce some of this strain, the Australian Government introduced the First Home Super Saver (FHSS) Scheme in the 2017 Federal Budget. The FHSS Scheme allows you to boost your savings for your first home by building a deposit inside superannuation.
From 1 July 2017 you can make voluntary concessional (before-tax) and non-concessional (after-tax) contributions into your super fund to save for your first home. You can contribute up to a maximum of $15,000 in a single financial year that can later be released. The maximum amount of personal contributions that can be released is $30,000 per person plus associated earnings. From 1 July 2018 you can apply to release your contributions along with associated earnings. Contribution limits apply.
To be eligible for the FHSS Scheme, you must:
The tax benefits provided by superannuation allow you to accelerate your savings.
For example: salary sacrifice contributions to super are taxed at 15%. This is lower than the marginal tax rate most Australians pay, which is between 19% - 45%.1
When your first home deposit is released from super, it will also be taxed at your marginal tax rate less a 30% tax offset. It sounds complicated, but the result is most Australian workers could enjoy a significant tax reduction by saving part of their first home deposit inside super.
Let’s look at an example:
James is an electrician earning $90,000 a year. He pays a marginal tax rate of 37%.2 He wants to save for a first home deposit in super so he sets up a salary sacrifice arrangement with his employer. The concessional (before-tax) contributions he makes are taxed at 15%. Then, when he withdraws his deposit, he pays an additional 7% in tax (37% marginal tax rate less 30% tax offset) for a total of 22%. If James saves the full $30,000, that means a tax saving of $4,500 which can go towards his first home.
Another benefit of saving inside super is the interest rate on offer. The FHSS Scheme provides an interest rate (called deeming) that is currently set at 3% plus the current bank bill rate, making a total of 4.78%. This is higher than the interest rate for savings accounts offered by major lenders that currently range between 1.5% to 3%.
The size of benefit provided by the FHSS Scheme changes depending upon your marginal tax rate, the size of additional annual super contributions you make, and how long you’re willing to wait before you buy a home.
For example:
Laura is a nurse who earns $80,000 a year. She salary sacrifices an extra $4,000 per year to super to save for her first home. Over eight years, Laura manages to save $28,679. That’s $8,030 more than if she’d saved the same amount from her take home pay in a standard savings account.3
However, if Laura increased her contributions to $5,000 per year, in six years she would have $27,179. That’s $6,849 more than she would have saved outside super.3 So, although Laura would be able to withdraw her deposit two years earlier, she would not receive the additional $1,181 in benefits that would have accrued had she reduced her contributions and waited an additional two years. However, Laura would need to take into consideration whether property prices are increasing at a faster rate than the benefits on her savings.
As shown above, there are a range of factors to consider when deciding if the FHSS Scheme is right for you. Ultimately, if you’re unsure, it’s best to see a financial planner. A planner can work with you to break down and prioritise your financial goals and build a personal plan to achieve them. The right advice can help you take advantage of all the benefits available to you and avoid making costly mistakes.
To make an appointment with an EISS Financial Planner call 02 9046 1920 or email [email protected]
1 Includes Medicare Levy for individuals earning more than $18,200 per year.
2 ASIC, MoneySmart, Australian income tax calculator (www.moneysmart.gov.au)
3 Australian Government, First Home Super Saver Scheme – Estimator (www.budget.gov.au)
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