Chris Forrest- Senior Partner and Principal Adviser
Sovereign Wealth Partners
The 2021 budget has expanded an underutilised scheme to help people save for their first home deposit. This stress is not new as home prices accelerate and many clients worry about the ability for their children to afford their own home. There are many considerations, but one strategy is available to save more effectively to buy that first home sooner. The First Home Super Saver Scheme (FHSS) was introduced with effect from 1 July 2017 as a budget measure to reduce pressure on housing affordability. Since then, there have been a few changes to enhance the scheme. In essence, it enables the use of superannuation as an effective savings vehicle to build that deposit.
How does it work?
A prospective first home buyer can make voluntary contributions to super, in the form of concessional (salary sacrifice) or non-concessional (after tax) contributions. These voluntary contributions are available to withdraw, if certain criteria are met, for the purpose of buying your first home. This is, however, capped at $15,000 of voluntary contributions made in any one financial year and must be within the relevant contribution caps. The sum that can be withdrawn was initially capped at $30,000. The 2021 budget extends the cap to $50,000.
Who is Eligible?
Age is no barrier to making the voluntary contributions, but you must be over 18 to make a release request. Also, you must never have owned property of any description in Australia. The only exception to this is under financial hardship provisions. Eligibility is assessed on an individual basis which means a couple could potentially access up to $100,000 less any associated tax.
Tax on Release
Voluntary concessional contributions released under this scheme will be taxed at an individual’s marginal tax rate plus Medicare less a 30% tax rebate. Voluntary non-concessional contributions are not taxed.
Associated earnings (i.e. earnings associated with those voluntary contributions) are taxed at an individual’s marginal tax rate plus Medicare less a 30% tax rebate. (Associated earnings are calculated daily based on the shortfall interest charge, details of which can be found here).
Note: You will need to include the released funds in your tax return for the relevant year.
How to withdraw funds
There are two aspects to consider. The process and the time it will take.
- Check you have made all the voluntary FHSS contributions you wish to make;
- Request your FHSS determination from the ATO – this will confirm your maximum FHSS release amount. This must be done prior to signing a contract;
- Once you sign a contract, request the release of funds within 14 days of signing
- Allow 15-25 business days for the funds to be released and paid to you.
Some conditions to be aware of include:
- You must live in the premises you are buying, or intend to as soon as practicable;
- You intend to live in the property for at least six months within the first 12 months of ownership;
- You must apply to the ATO for and receive an FHSS determination before signing a contract for your first home and before applying for release of your FHSS amounts.
- You have 12 months from the date you make a valid release request to notify the ATO if you have signed a contract to purchase or construct your home.
- You can only access voluntary contributions – you cannot access mandated contributions, including employer and spouse contributions;
- You can only apply once (so get it right!).
- Contributions come out in the order they go in (so be sure to make voluntary concessional contributions prior to non-concessional in the year of contribution).
- Funds can only be used to purchase a residential property. This means that it cannot be used to purchase vacant land, but can be used to enter into the contract to construct to meet the scheme requirements.
The tax efficiency of using super as a savings vehicle makes this a compelling strategy to consider when saving for a home deposit. It does take forethought, planning and discipline and, for many, will be a worthy part of a savings strategy.
On its own, it may not be enough to get that deposit together, but it may well accelerate the process when combined with other strategies. Certainly, for a couple, the journey will be quicker.
Should you need advice or know someone who might benefit, Sovereign Wealth Partners can help.