The First Home Super Saver (FHSS) scheme may allow you to save more money to put towards buying your first home by using the tax advantages around super – here’s a guide to help you decide if it’s right for you.
1. What is the FHSS scheme?
From 1 July 2018, under the FHSS scheme, you can access your super to withdraw an amount of voluntary concessional (before-tax) and non-concessional (after-tax) superannuation contributions made since 1 July 2017, along with any associated earnings, to put towards buying your first home.
If you’re eligible under the FHSS rules, you can contribute a maximum for future withdrawal of $30,0001, plus associated earnings, with your contributions capped at $15,000 per year. Couples can combine forces and access a total of $60,000 of their eligible contributions, plus associated earnings.
By putting your money in super and not in a savings account, you can make the most of the 15% superannuation tax rate which in many cases may be less than your personal income tax rate, and could leave you with more money to put towards buying your first home.
2. What are associated earnings?
Associated earnings represent the interest or ‘deemed rate of return’ on your concessional and non-concessional FHSS contributions, calculated based on the 90-day bank bill rate plus three percentage points (shortfall interest charge rate).
You should also note that concessional contributions and associated earnings withdrawn will be included in your assessable income at tax time and taxed at your marginal tax rate minus a 30% non-refundable tax offset.
3. Are you eligible?
According to the Australian Taxation Office (ATO), you can start making super contributions from any age, but you can only request a release of amounts under the FHSS scheme once you are 18 years old, and if you:
- have never owned property in Australia – this includes an investment property, vacant land, commercial property, a lease of land in Australia, or a company title interest in land in Australia (unless the ATO determines that you have suffered a financial hardship)
- have not previously requested the ATO to issue a FHSS release authority in relation to the scheme.
Eligibility is assessed on an individual basis which means couples, siblings or friends can each access their own eligible FHSS contributions to purchase the same property. If any of you have previously owned a home, it will not stop anyone else who is eligible from applying.
4. Getting started by saving in your super
Please be aware that some employers may not offer salary sacrifice arrangements to their employees. Also, be mindful that there’s no change to the amount of money you can contribute to your super – the existing superannuation contribution caps still apply. Under the FHSS scheme, your contributions still count towards your contribution caps for the year in which they were originally made.
5. Accessing your money to buy your first home
It is important to note that you must apply for, and receive, your withdrawal under the FHSS scheme prior to entering into a contract to purchase or construct your first home – if you enter into a contract first you will be ineligible to make a withdrawal under the scheme.
When you are ready to receive your FHSS amounts, you need to apply to the Commissioner of Taxation for a FHSS determination and a release of your savings. You will be able to apply online from 1 July 2018 using your myGov account linked to the ATO.
Remember, the ATO – not your super fund – will decide what counts towards the FHSS scheme. As such, the ATO will tell you the total of eligible FHSS contributions you can take out, the associated earnings and how much tax will need to be withheld.
Once you have submitted your release of savings application, the ATO will issue a release authority to your super fund/s and your fund/s will send the requested release amounts to the ATO.
The ATO will then withhold the appropriate amount of tax, send the balance of the released amount to you and send a payment summary to you. This will show your assessable FHSS released amount, which is comprised of your voluntary FHSS contributions and any associated earnings on these contributions.
You need to include this amount as assessable income when completing your tax return for the financial year you request the release. The tax payable on this assessable amount will receive a 30% tax offset (any tax payable is also reduce by the estimate of tax withheld by the ATO).
6. Don’t forget, the ATO is watching
The ATO is in charge of ensuring any money withdrawn from your super fund under the FHSS scheme is used to buy your first home. It must have released an FHSS amount to you before you sign a contract to purchase or construct residential premises, otherwise you will be ineligible to make a withdrawal under the scheme.
Once the funds are released you have 12 months to enter into a contract to buy a residential premises. As it may take some time to release the money from the ATO to the super fund, it’s worth planning ahead.
If you release the money and do not buy a home within 12 months you either have to recontribute it back into your super or pay a FHSS tax penalty of 20% of the assessable amount released from super. If required you can apply to the ATO for an extension of time.
Additionally, you must notify the ATO if you either sign a contract to purchase or construct a home, or recontribute the amount into your super fund or you will be subject to the FHSS tax. You can make this notification from 1 July 2018. To find out more, visit the ATO’s website.
7. Consider the pros and cons before you take the plunge
Is the FHSS scheme right for you? While it may help you save more money to put towards buying your first home, it is a less flexible way to save than many options outside super. The FHSS scheme could also impact your future retirement savings. To better understand the potential pros and cons before taking the plunge, visit the ATO’s website for more information or speak to a financial adviser.
1 Any eligible concessional contributions released are reduced by 15% to allow for tax on contributions
*Note: In some cases making salary sacrifice contributions may reduce the compulsory Super Guarantee contributions your employer makes. So, prior to entering into a salary sacrifice agreement, you should clarify the terms of your employment to ensure it won’t impact on the level of Super Guarantee contributions being paid.