Free Money for First Home Buyers
Saving for a deposit can often be the toughest part of getting into a first home. Rapidly rising property prices has raised the bar when it comes to the amount required for a deposit. For many first home buyers this has pushed the dream of home ownership just out of reach.
But now the Federal Government has launched its First Home Super Saver (FHSS) Scheme. This means a boost to the savings of first home buyers.
Free money – what’s not to like?
Well turns out it’s a little bit involved, but read on to find out if it can help you achieve your dreams of home ownership sooner.
- are over 18
- have not previously owned property in Australia (it doesn’t matter if your partner or other joint buyer has)
- earn more than $40,000 annually (it’s just not worth bothering on less than this)
- have not previously released FHSS funds
- intend to live in the home you are buying as soon as practicable and for at least six months of the first 12 months you own it.
You may be able to use this scheme even if you don’t qualify for the First Home Buyers incentives in your State.
What you need to know
The scheme works by giving you access to the tax benefits of making extra superannuation contributions and allowing you to withdraw those contributions for use as a down payment on your first home. These tax benefits allow you to accumulate a bigger deposit for the same effect on your monthly budget.
Some numbers will help clarify.
When your employer pays you each month, you must pay tax.
The rate of tax increases, the more you earn. If you earn $50,000, you will pay 34.5% of each extra dollar of income you earn. This rate applies to incomes between $37,000 and $90,000. Money paid into your super fund would be taxed at 15%.
So, say you were comfortable with saving $500 each month from your pay towards your deposit. Instead of your employer paying you $763 to end up with $500 in your pay packet you ask your employer to pay the $763 to your super fund, resulting in a $649 after tax contribution. These means you have an extra $149 invested and still have the same amount to spend on your day to day living expenses.
However, when you come to take it back out from your super fund, you will need to pay some more tax. The withdrawal is added to your income in the year you request the withdrawal and you get a credit of 30%. This means that if you withdraw that $649 you would be up for $29 in tax leaving you with $620.
So overall you are $120 better off for each month you do this.
Same goes for the investment or interest income you earn on your savings.
Every $1 of earnings you earn personally will also be taxed at 34.5% leaving you with $0.65.
In your super fund, that $1 of earnings would be taxed at 15% (leaving $0.85) and a further 4.5% (34.5% tax less the rebate of 30%) on withdrawal. This way you end up with $0.81.
Even better because you have more money working for you - $649 instead of $500, in the example above, you can earn more income. What this means is that for every $1 (after tax) you could earn outside super you could have earned $1.61 through using the super scheme.
So if some is good, more must be better – right?
Well there are some limits on how much you can contribute.
- firstly, you get top do only one withdrawal in a lifetime.
- a lifetime limit of $30,000 in contributions is eligible for withdrawal
- an annual limit of $15,000 in contributions is eligible for withdrawal
- the normal annual limit ($25,000) on concessional (that is, those contributions eligible for a tax deduction) applies to the total super contributions you can make in any one tax year. This includes the normal contributions your employer makes which amount to 9.5% of your salary. This means that if you earn over $105,260, your employer will contribute more than $10,000 in super, so you won’t be able to access the full annual limit of $15,000 for this scheme.
What if I don’t spend it on a home after I withdraw it?
If you have saved using this scheme, withdraw the money and don’t spend it on a home within the 12 months allowed, you have a few options:
- apply for an extension of time of up to a year. You are allowed to do this but don’t bet on actually being granted an extension.
- put the money back into your super fund
- pay an additional amount of tax on the amount of the withdrawal – 20% of the amount you withdrew. This will put you in a slightly worse position than if you’d just saved the money another way. This penalty amounts to about $10 for each $500 you would have saved.
If you have a HECS debt
The amount you salary sacrifice will reduce your taxable income and therefore the amount of PAYG your employer will withhold form your pay.
However, it doesn’t reduce your Repayment Income used to calculate the amount of HECS you need to repay in that year.
This may mean you will have to pay extra when you lodge your tax return. The total HECS repayment you make doesn’t change. You just pay it at the end of the year rather than your employer deducting as you go.
So. Be. Prepared.
The amount you receive when you withdraw your super will not be counted when calculating your HECS payment in that year.
If you are close to a tax rate threshold your benefit will be reduced
The rate of tax you pay on your income rises as you earn more. For example at $90,000 the rate jumps from 34.5% to 39% and at $180,000 it rises again to 47%.
So if you earn $90,000 each dollar you put in Super will save you $0.345 in tax, but when you take it out again it will be added to your income and taxed at 39%.
This reduces the benefit by about a quarter (from $120 per month to $90 in the example above of putting aside savings of $500 after tax).
What you need to do now
- Check whether your super fund is participating in the scheme. That is that it will allow you to make withdrawals under the First Home Buyers Super Scheme.
- Ask your employer whether they will allow you to “Salary Sacrifice” into super AND that if you do they won’t change the amount of employer contributions they will make.
- Advise your super fund which investment option you would like your contributions to be invested in. You may need to consult an adviser.
- Periodically check your contributions are arriving in your fund and being invested in accordance with your instructions. Your employer must make these contributions quarterly.
What you need to do when you want to spend your savings
- When you are ready to buy your first home, apply to the ATO to withdraw your extra contributions. You need to do this before you sign the contract to buy your home.
- You can apply online through your MyGov account. This will also give you an instant estimate of how much you will get.
- A day or so later you will receive a manual form in your MyGov inbox. Complete this form and send to the ATO.
- You can monitor the progress on MyGov and a couple of weeks later you will see the money leave your super account.
- The cash will arrive in your bank account a couple of weeks later
- You must spend the money within a year of withdrawing it. If you don’t you can apply for additional time (don’t bet on getting it, though), return it to your super fund or pay some extra tax and keep it
- Enjoy your new home.
If you need any further clarification of how this might help you in your search to buy your first home, simply ask your Sherpa.
Founder and Chief Sherpa
With over 25 years in Financial Services from consulting to management, Vince Scully is the go-to guy for wealth management and financial advice. Vince founded the Calliva Group; a fund manager, product issuer, advisor and lender to Government and private clients. Vince is an advisor to the Wealth Management Industry, and prior to his role as CEO at Calliva, a senior member of Macquarie bank’s infrastructure team.