Friday Q & A – First Home Super Saver Scheme
I’m looking to buy a home in the next couple of years and have heard about the First Home Super Saver Scheme. Is it worth it?
Saving for your first home is tough so any advantage you can give to give your savings a boost is great.
The First Home Super Saver Scheme (FHSSS) is a newish scheme where you can make voluntary contributions to super and save tax and withdraw these contributions (plus earnings) to use for your first home deposit.
The scheme allows you to contribute up to $15,000 per year (up to a max of $30,000) however these contributions count towards your normal contribution caps of $25,000 for concessional contributions and $100,000 for non-concessional contributions.
The main benefit of this scheme is when you make concessional contributions by salary sacrificing or making personal contributions and claiming a tax deduction.
So how much is this tax saving?
There are a few things to consider but basically the value is in the tax saving (not necessarily the deemed earnings) so the formula is: (contribution x (marginal tax rate - 15% (30% if Div 293 applies))-(contribution x .85 x (marginal tax rate - 30%).
One thing rarely mentioned is that the $15,000 is included in your $25,000 concessional contribution cap when you claim a tax deduction or do it via salary sacrifice. Your standard employer contributions (e.g. 9.5% is also included so... if you max the $15,000 you only have $10,000 left for your mandated employer contribtutions. $10,000 / .095 = $105,263.16 so if your salary is over this (where your marginal tax rate is 39%, you can't take full advantage of it as you will go over your cap, defeating the purpose). This, therefore, reduces the effectiveness to do quickly the higher your income. From 1 July 2018, unused concessional contributions carry forward so this could help unless your income was particular high in these years as well, using up more of the cap.
As can be seen, the tax savings are material. This is based on $15,000 so you can double these if you make use of the maximum $30,000 and double these again if you and your partner both do it. I’ll also note that these tax savings are immediate if you salary sacrifice however if you make a contribution and then claim a tax deduction, you won’t see the benefit until you submit your tax return. The investment earnings in super are also taxed more favourably than in your personal name so this is another advantage.
The disadvantage is that it’s a stupidly complicated way to achieve a relatively simple outcome and there are admin hurdles. Such details are you have to make the contribution, claim a tax deduction (if this is your plan), get a release authority from the ATO, apply to your super fund to release your funds, the fund will pay the funds to the ATO who will then pay the funds to you (after they’ve taken out applicable taxes). These steps don’t happen overnight and must be completed prior to signing a contract so would ideally want this all completed prior to starting your home search as you wouldn’t want to miss out on a home because your deposit can’t be withdrawn in time. Once your deposit has been released you have 12 months to purchase a home or another 12 month extension can be applied for.
The other issue is that Labor has proposed to abolish this scheme and given they’re the favourite to win the election in a couple of months time this brings with it political risk. Any contributions made prior to then almost certainly would be “grandfathered” so that they can still be withdrawn but is another thing to take into account.
Another issue is a lot of super funds aren’t totally across this scheme and I’ve heard of funds now allowing it. Make sure you have a chat to your fund to confirm that they support it and will release your funds prior to making any additional contributions.
Lastly, most peoples super is predominately invested in growth assets which bring with it volatility. This investment strategy probably isn’t appropriate for most peoples home deposit as these home deposits may be needed in the next few years so defensive assets like cash are often a more appropriate investment. When calculating how much you can release, the ATO assumes a standard return (currently 4.96%) which is better than a cash option however these funds are still invested in growth assets. If returns are greater than 4.96% over this time, great. However, if they’re less than this you’re effectively stealing from your super balance/future self. For this reason, I think these funds should be invested in super the same as you would outside super and this can be achieved by altering your investment preferences in your current super or if you want to keep it really clean, possibly opening a 100% separate super fund that’s invested as you would outside so long as the fees aren’t prohibitive.