In a surprise move by the Libs, First Home Buyers will effectively be able to ‘Salary Sacrifice’ to Superannuation to save for a home deposit. The proposed changes in the budget released on the 9th of May means Australians will be allowed to make up to $30,000 worth of voluntary contributions (capped at $15,000 per annum) to help save for a home deposit from 1 July 2017.
So how exactly does this work?
First things first, this is restricted to first home buyers only and though we haven’t seen the full details, we expect it will be treated similar to the FHOG (First Home Owners Grant), meaning it will need to be your primary residence for at least the first 12 months.
Young (and old) Australians will be able to Salary Sacrifice up to $30,000 (capped at $15,000 per annum) to Superannuation, effectively reducing their taxable income like normal Salary Sacrifice to Superannuation would. However, this money is ‘set aside’ within your Superannuation account and can then be withdrawn from 1 July 2018. Like Salary Sacrifice, contributions will be taxed at 15% into Superannuation as opposed to your ‘marginal’ tax rate, for most people, representing a tax saving of about 17c to every dollar. Upon withdrawal, the money is then taxed at your marginal tax rate less a 30% offset. These withdrawals will be allowed from 1 July 2018.
The Government has released a calculator which will aid those in calculating the benefits of the scheme1, showing benefits of up to $6,000+.
I’ve nearly saved for my Home Deposit… What about me?!
From 1 July 2017 all working Australians can claim a tax deduction for contributions put into Superannuation ‘out of pocket’. Previously, only those who were self-employed could do this, ’employees’ had to organise salary sacrifice through their employer and take it out ‘week to week’. What this means is at anytime through the year, you are able to make contributions to Super directly from your bank account and claim it as a tax deduction when you do your return.
So how does this help me again? It means that those who have already saved a deposit will be able to contribute up to $30k of that ($15k per year), into Superannuation, claim it as a tax deduction and take advantage of the scheme.
I’m concerned that my Home Deposit will now be at the mercy of the markets
At this stage it appears that your home deposit will be at the mercy of the markets and withdrawals will only be allowed with interest based on the 90-day bank bill rate + 3%, any interest earned above this will simply contribute to your nest egg. With most industry funds utilizing MySuper and investment allocation based on age, the main demographic that will utilise this scheme, young people, may have 80%+ in growth assets which can drop significantly overnight. It would be important to ensure the asset allocation of your fund reflects your tolerance to this risk.
Pros/Cons and things to keep in mind
- Super Guarantee (SG) payments – An employer has the right to make your compulsory contributions to Superannuation on your ‘net of salary sacrifice’ income. Meaning if you do utilise this scheme, you may have your SG contributions reduced by up to $1,425 per annum2! This comes down to your employer and how they pay Super.
- HECS/HELP Debt – This is actually a positive! HECS/HELP thresholds are based on ‘taxable income’, this scheme will reduce your taxable income. With the new changes to HECS/HELP thresholds, this may be a way to avoid making HECS/HELP payments on the lower thresholds.
- The normal contribution caps still exist – These contributions will count towards the $25,000 (from 1 July 2017) concessional contribution caps. This isn’t a large issue as those saving for a home aren’t that concerned with making additional contributions towards their retirement.
- Administrative Changes – I won’t delve into this too deeply, but this is a MASSIVE administrative change for Super funds. This change will come at a significant cost for Super funds, which will no doubt be passed onto members.
- Increasing house prices – Making it easier for people to buy a home is a double edged sword. Will this scheme inflate house prices further? Only time time will tell!
- It still needs to be passed – It is currently a proposal, but we don’t expect too much backlash on making buying your first home easier, we expect it to pass.
As a whole, this scheme isn’t too bad. It feels like an extremely complicated way to help first home buyers but the end savings can’t be denied. It feels as though the government has palmed off the administrative burden to Super funds instead of coming up with a separate ‘account’ that they would have to administer. Putting my ‘Financial Planner cap’ on, a big positive I see of this is young Australians actually starting to think about Superannuation. Those with 2 or 3 Superannuation accounts wanting to buy their first home may seek advice on this scheme which will be a stepping stone to broader quality advice.
- Based on reducing your SG eligible salary by $15,000 at a SG contribution rate of 9.5%
Information current as of 10 May 2017
This information is of a general nature only and has been prepared without taking into account your particular financial needs, circumstances and objectives. While every effort has been made to ensure the accuracy of the information, it is not guaranteed. You should obtain professional advice before acting on the information contained in this publication.