First home buyers will get a tax saving of between $5000 and $6000 after one of the government’s key housing affordability measures cleared Federal Parliament on Thursday.
The First Home Super Saver Scheme is designed to help young Australians over what has been identified as the biggest hurdle to getting into the property market: a deposit.
It does this by allowing people to save up to $15,000 a year, and no more than $30,000 overall, using their superannuation fund, where money is taxed concessionally.
Scheme participants will get between $150 and $175 of tax benefits per $1000 of salary, depending on which marginal tax rate they are on, according to advisers.
An average wage earner on $80,000 a year will get between $5000 and $6000 in tax savings by using the system instead of depositing the same amount into a normal bank account.
Contributions made above the 9.5 per cent super guarantee since 1 July 2017 will be eligible for withdrawal from July 1, 2018.
There is 12 months to use the money, so there is a good window of time to organise everything.
If for some reason the savers do not end up buying buy house, the money can either be return to the super fund or kept outside of super, in which case it will be taxed as if it was income in the first place.
Smart Ways to make the most of the Home Super Scheme
There are savvy ways to use to help you (or your kids) build a bigger deposit.
If you already have savings, it may be worth using them to make the maximum contributions (up to $15,000 a year and no more than $30,000 overall) now rather than “drip feeding” smaller amounts each year.
That’s because the interest calculations for what you can take out start at your first deposit (July 1, 2017 for contributions deposited this financial year).
CASE STUDY: The comparison can be made of someone with annual taxable income of $55,000 who puts in $15,000 a year for two years versus someone on the same income contributing $6000 over five years. In both cases the intention is to buy a first home in five years.
So what would they both get after five years? According to the government calculator, the first person would get $29,041 after tax ($8,844 more than from a standard savings account mainly because of the tax savings). The second person would get $27,026 ($7,298 more than from a standard savings account). That’s $2015 more.
4.78 per cent interest
These calculations are based on a “deemed rate of return” based on the 90-day Bank Bill rate plus three percentage points. At the moment it’s 4.78 per cent.
The strategy of putting in bigger amounts early might also be of interest to parents wanting to help their offspring get into the property market.
If these larger contributions aren’t possible, it may be smart to set up a “salary-sacrifice” arrangement with your employer so you get into the discipline of making do on less over time rather than scrabbling to come up with a lump sum once a year.
Salary-sacrifice means you specify a certain amount of your pay that doesn’t get paid to you after-tax but instead goes into your super fund before tax is paid. That way you get a bigger amount to invest because rather than receiving the money as salary having paid 34.5 percent tax (using the same $55,000 income level), only 15 percent super contributions tax applies. (By the way, the super saver scheme does not include the compulsory super contributions your employer makes on your behalf.)
It is possible to make tax-deductible personal contributions as well, up to the $25,000 concessional cap.
If you (or your offspring) can make do with $125 less after-tax each week, that equates to $191 going into your super fund before tax (just under $10,000 a year). Once 15 percent super contributions tax of just under $1500 has been paid, that leaves about $8500 towards a deposit. If instead you were using after-tax money to save in a bank account, you’d have just over $6500 to work with (having paid tax of about $3445).
Choose asset class
It is important to ensure you minimise your risk by opting for a different asset allocation for these funds compared to your longer-term super savings.
If your aim is to buy in under three years, opt for very low risk assets in your super fund such as cash and term deposits.
If you’ll need the money in three to five years, look at a conservative asset allocation of around 25 percent in growth assets; for five to seven years perhaps 50 percent growth assets such as shares; and more than seven years, 75 per cent plus in growth assets.
You’ll only be able to withdraw the deemed interest and not any additional growth but, leaving extra in super will boost your retirement coffers. On withdrawal with the stipulation, among others, that you’ve got to sign a contract to buy or build a home in 12 months, you’ll pay tax at your marginal rate minus a 30 per cent offset.
If you change your mind, you can either leave the money in super or withdraw it and pay tax on it at your marginal rate (taking into account the 15 percent contributions tax already paid on the way in).
The super home buyer scheme is a good way to save because of the tax benefit and removes the temptation to squander the money.
For more information, email Steve Blizard on firstname.lastname@example.org