Let’s face it, getting your foot on the first rung of the property ladder is not only hard, for an increasing number of younger Australians, it’s downright impossible.
As housing prices, particularly in capital cities, continue to outstrip wages growth, even saving for a deposit to buy a house can seem all too hard. It’s a bit like taking one step forward and two steps back, right?
Well, that’s the bad news.
But the good news is that the Government has introduced measures in the 2017 Budget to help address the housing affordability crisis by assisting first-home buyers through tax incentives and voluntary savings, to help them purchase their first home.
The First Home Super Saver Scheme (FHSSS) will enable first-home buyers to voluntarily salary sacrifice a portion of their income to their superannuation and withdraw this later, along with any interest made on their voluntary contribution, to purchase their first home. This differs from standard superannuation your employer pays, which is generally locked away until you turn 60 and either leave your employment or have retired.
Sounds pretty good, doesn’t it? But before you jump in, there’s a couple of things you need to know.
Any voluntary contributions you make under this scheme that can be withdrawn will be limited to $15,000 per year, up to a maximum of $30,000. That’s it, no more after that amount.
And don’t forget, your voluntary super contributions aren’t tax-free, so you will still be taxed at your marginal tax rate, with a 30 per cent offset applied.
But to help you get on the property ladder faster, the Government will allow you to start making withdrawals from your superannuation account from 1 July 2018.
And, if you want to buy your first home sooner, why not pool your funds with your partner? That’s right, under the FHSSS, each member of a couple can use their own super account to pool up to a combined maximum of $60,000 (that’s a maximum of $30,000 each) and withdraw this amount to purchase their first home. By both making additional voluntary contributions through salary sacrificing to their super, a couple can effectively double the amount available for a deposit.
However, it’s important to note that unlike your voluntary contributions that you can withdraw under this scheme, the 9.5 per cent (Superannuation Guarantee) of your salary that your employer pays into your super fund cannot be withdrawn under the FHSSS. That amount is locked away until you turn 60 and either leave your employment or have retired.
So, let’s take a look at a practical example of a first-home buyer who wants to use her super to save for a deposit on her first home.
Jenny earns $70,000 a year and contributes $10,000 in salary sacrifice contributions in 2017-18 and 2018-19. That’s $20,000 all up.
Jenny wants to make a withdrawal to purchase her first home on 30 June 2019. At this date, Jenny’s contributions total $17,000 after contributions tax. The earnings associated with these contributions total $698 (based on the current Shortfall Interest Charge of 4.78 per cent per annum). This provides her with a before tax withdrawal amount of $17,698.
Jenny will pay tax at her marginal tax rate of 34.5 per cent (including Medicare levy – and don’t forget, that’s increasing to 2.5 per cent from 1 July 2019) with a 30 per cent offset applied. This will result in $796 in tax, leaving Jenny with a net withdrawal of $16,902 to put towards the purchase of her first home.
While it may not seem like a lot, by forgoing the purchase of, say, a new car and cutting back on her everyday expenses like buying a coffee and lunch at work each day, Jenny was able to use these savings for making additional voluntary contributions of $20,000 through salary sacrificing. So, in two years, she was able to save just under $17,000 to put towards her first-home deposit. And if Jenny adds this amount to her other investment savings, it all adds up pretty quickly to a decent deposit… and her dream home.
So, for any first-home buyers struggling to save a deposit for their first home, there’s no doubt the FHSSS can help them do this. Not only does it provide them with tax incentives, it provides them with the flexibility to draw upon their voluntary superannuation contributions made through salary sacrificing to get their first step on the property ladder.
And to help you determine the amount you will be able to withdraw to purchase your first home and the tax advantage you will enjoy, the Government has even provided an easy to use estimator to help you. Just go to budget.gov.au/estimator.
Darren Foster, Senior Financial Planner, Paris Financial
Follow me on Twitter @darren_df