Q. My husband and I are saving to buy our first home. Can you please explain how the proposed First Home Super Saver Scheme announced in the 2017 Federal Budget will work and what we need to do to take advantage of the incentive?
A. From 1 July 2018, first home buyers will be able to access their Superannuation to withdraw voluntary contributions made to their Superannuation fund from 1 July 2017, including associated deemed earnings, to purchase their first home.
Under this initiative, up to $15,000 per year and $30,000 in total can be contributed to Superannuation per person. Both members of a couple are eligible to take advantage of this measure to buy their first home. Effectively a couple can make a combined contribution of up to $30,000 per year and $60,000 in total.
The contributions will be included in the applicable Superannuation contribution caps. The Concessional contribution cap which includes Employer contributions or personal deductible contributions will be $25,000 and the Non-concessional contribution cap (personal after-tax contributions) will be $100,000 per financial year effective 1 July 2017. Voluntary Concessional contributions will be taxed at 15% when made to the fund. Non-concessional contributions can be made tax free.
Investment earnings available for withdrawal will be calculated at a deemed rate of return. The deemed rate of return will be the 90 day Bank Bill rate plus 3%. Based on the current 90 Day Bank Bill rate of approximately 1.74%, the deemed rate of return would be 4.74%.
Concessional contributions and earnings that are withdrawn to purchase a property will be taxed at the individual’s marginal tax rate less a 30% tax offset. When Non-concessional contributions are withdrawn, they will not be taxed, however, the earnings are anticipated to be taxed at the individual’s marginal tax rate less the 30% tax offset.
The First Home Super Saver Scheme will be administered by the ATO. The ATO will determine the amount of contributions that can be released as a deposit and they will instruct the Superannuation funds to make the withdrawal payment. The ATO will administer the compliance to ensure the funds are used to purchase a first home.
As the initiative caps out at a limit of $60,000 per couple, using this strategy should be used as part of an overall strategy of saving for a home deposit.
To make the most of the strategy, if you plan to buy a home in the next 3 years, you would want to start the strategy as soon as possible. As the pre-tax contributions will be limited to the Concessional Contribution Cap of $25,000 which includes Employer Superannuation contributions, if you currently earn $120,000, then you already would receive at least $11,400 in Superannuation Guarantee contributions a year so you would, therefore, be limited to $13,600 a year of voluntary Concessional contributions towards your first home deposit.
It is important to recognise that at this stage the First Home Super Saver Scheme initiative is only a proposal. The proposal will require the passage of legislation before being implemented. My understanding of how the initiative will operate is limited to what information has been published to date. There are some aspects requiring further clarity; for example, what happens if the value of the Super fund actually falls or the rate of return is less than the deeming rate? In either of those instances, how much can be withdrawn? What happens to eligibility if one member of a couple has previously purchased a home? What are the consequences of breaching the rules? Stay tuned for further detail once the legislation is released.