Is the First Home Super Saver Scheme worth using?

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on May 17, 2022
Is the First Home Super Saver Scheme worth using?

The First Home Super Saver Scheme purports to offer first home buyers a leg up into the property market, but is it all it’s cracked up to be?

Update: Looking for details on the government's slated Super Home Buyer Scheme? 

The First Home Super Saver Scheme (FHSSS) was first introduced to us in the 2017-18 Federal Budget by the then-Treasurer Scott Morrison. Under this scheme, first home savers can make voluntary concessional (taxed at a discounted rate of 15%) and non-concessional (already taxed at their marginal rate) contributions into their super fund which can later be withdrawn for a deposit on a first home

According to the Australian Taxation Office (ATO), first home buyers can contribute a maximum of $15,000 in any one financial year to the FHSSS scheme, and a maximum of $30,000 per person overall. So if you're buying a house with a partner, together you could be withdrawing up to $60,000 (before tax) in voluntary contributions (plus associated earnings) from your super balances.

Changes coming 1 July 2022

From 1 July 2022, the amount of eligible contributions that can count towards your maximum releasable amount across all years will increase from $30,000 to $50,000. The amount of eligible contributions that can count towards your FHSS maximum releasable amount for each financial year will remain at $15,000.

Bear in mind that Australia's superannuation system only allows a maximum of $25,000/year to be contributed to your super at the concessional tax rate of 15%, which includes the minimum 10% super guarantee from your employer - to rise to 10.5% from 1 July.

So, for example, if you earned $120,000 per year, your employer would have to pay at least $11,400 (9.5% of $120,000) on top of that into your super, which means you can only contribute an extra $13,600 ($25,000 limit minus $11,400) into your super at the concessional rate.

We've all heard how hard it is for young Australians to buy their first property in today's market, given the sky-high house prices, slow wage growth and the abundance of luxuries millennials seemingly struggle to forgo. So does saving for a housing deposit through a super fund make it any easier?    


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Why use the FHSSS? It's all about the tax savings

Concessional super contributions are only taxed at 15%, as opposed to your marginal income tax rate, so salary sacrificing some of your pay into your super can save some serious coin.

When it comes to withdrawing these funds and the associated earnings (info about this below), the amount will be subject to a ‘withdrawal tax’ rate equal to your marginal tax rate (plus Medicare levy) minus a 30% tax offset. So, if your marginal tax rate was 32.5% and the Medicare levy is 2%, the amount would be subject to a withdrawal tax of 4.5% (32.5% marginal rate, plus 2% Medicare levy, minus 30% tax offset).

How much does the FHSSS give in returns? 

Along with allowing withdrawals of your voluntary concessional and non-concessional super contributions through the FHSSS, you can also withdraw the earnings on them. But contributions under the FHSSS don’t actually earn the same returns as the rest of your super balance.

These funds are instead ‘deemed’ to earn an annual return of the 90-day Bank Bill rate plus three percentage points, or 3%. This total rate is known as the ‘shortfall interest charge’ (SIC), which is updated quarterly. According to the ATO, the current SIC rate (April-June 2022) is 3.07%.

Given that many balanced super funds consistently achieve returns of over 8% each year, 3% p.a. seems pretty disappointing, but you might struggle to find a savings account or term deposit with an interest rate anywhere near that.

The potential tax savings generated through this scheme is arguably the main attraction of the FHSSS. According to Scott Morrison when it was first announced, most first home buyers could accelerate their savings by at least 30% using the scheme.

How much could you save with the FHSSS?

According to the Government’s FHSSS estimator, someone with a taxable income of $70,000 who salary sacrifices $15,000 a year into their super could have $25,437 available for a deposit after two years – $5,846 or 30% more than if they had saved through a standard deposit account or savings account paying 2% p.a. in interest.

However, the government's estimator also assumes an SIC rate of 4.78% p.a, and the assumptions haven't been updated since 2019, meaning the 'standard deposit' rate is also much lower than 2%, with Savings.com.au research showing averages closer to just 0.50% p.a. 

For other incomes, salary sacrificing the same amount over two years generates different results, as the government’s estimator demonstrates:

FHSSS $15,000 Annual Contribution For Two Years ($30,000 Total)

Taxable income

Annual reduction to take home pay

Deposit available after two years

Additional savings*

$40,000

$11,053

$26,764

$4,006

$50,000

$10,230

$25,551

$5,083

$60,000

$9,690

$25,282

$5,744

$70,000

$9,650

$25,437

$5,846

$80,000

$9,800

$25,575

$5,693

$90,000

$9,825

$25,575

$5,673

$100,000

$9,225

$25,575

$6,285

Source: Commonwealth Super Contribution FHSSS Estimator. *Compared to a standard deposit account (2% p.a.)    

As you can see, not everyone can accelerate their savings by over 30% by contributing the maximum $15,000 each year over two years. 

What about smaller, longer-term contributions? 

The example above is based on contributing the maximum annual amount of $15,000 for two years until the limit of $30,000. This is hardly ideal for someone earning $40,000 a year, as this would reduce their annual take-home pay by more than $11,000 (over $200 less per week).  

For people in the lower income brackets, you might want to consider taking your time and contributing smaller amounts over a longer period of time. We used the same estimator for $6,000 in annual concessional contributions over five years to see the difference it would make to a person's savings compared to a 2% p.a. savings account. 

FHSSS $6,000 Annual Contribution For Five Years ($30,000 Total)

Taxable income

Annual reduction to take home pay

Deposit available after five years

Additional savings*

$40,000

$4,380

$27,262

$5,567

$50,000

$3,960

$27,220

$7,269

$60,000

$3,840

$27,392

$7,568

$70,000

$3,890

$27,558

$7,300

$80,000

$3,930

$27,558

$7,254

$90,000

$3,930

$27,558

$7,257

$100,000

$3,570

$27,558

$7,638

Source: Commonwealth Super Contribution FHSSS Estimator. *Compared to a standard deposit account (2% p.a.)  

It's not just lower income earners that more spread-out contributions appear to benefit - both the deposit available come withdrawal time and the percentage difference in savings you could make are higher in this instance.

Slow and steady wins the race it seems when it comes to using the FHSSS. 

Who can use the First Home Super Saver scheme? 

As you may have assumed, you can only make contributions and withdrawals via the FHSSS if you've never owned a property in Australia before. The scheme's not designed to help you add a fourth investment property to your portfolio.

The one exception to this is if you have lost ownership of a previous property due to bankruptcy, divorce, a natural disaster etc. You'd need to contact your super fund however and fill out a First Home Super Saver Scheme hardship application form from the ATO for this to happen.

You also need to intend to live in the property for at least six months of the first year you own it. Besides that, you really just need to be over 18 in order to request a withdrawal, although you can start making contributions at any age. You also need to be a member of a registered super fund in Australia, which, if you're saving for a home, you should have alongside steady employment. 

Importantly, the FHSSS is also independent of other concessions for first home buyers, such as the First Home Owner's Grant, so you aren't limited to one or the other. 

Eligibility

To be eligible for the FHSS Scheme, you must:

  • Be an Australian citizen at least 18 years of age.

  • Never have owned a property in Australia, including a home, investment property, vacant land or company title interest in land.

  • Live in the property for at least six months within 12 months of buying it, or after it is practical to move in.

  • Never have applied for money to be released from the scheme previously.

What properties can be purchased with the scheme?

Vacant land isn’t eligible for the FHSS Scheme. However, if you’re building your own home, the building contract is eligible. So you need to put your savings inside the FHSS Scheme towards this and not towards your deposit on the block of land.

Aside from this, there are certain types of property that are ineligible for the scheme including houseboats, motor homes, campers or tiny homes.

You have 12 months to buy a home

After your savings are released, you have 12 months to purchase your own home or begin construction. When you do sign a contract to buy or build a home, you must notify the ATO within 28 days.

If you can’t meet this requirement, you can re-contribute the funds to your super fund or take a one-year extension. Alternatively, you can keep the money, subject to an additional 20% tax on your assessable FHSS Scheme released amounts.

Pros and cons of the First Home Super Saver scheme

Pros

  • You can save thousands in tax

  • You and your partner can both utilise the FHSSS towards the same house, eventually rolling the funds together into the same deposit

  • FHSSS funds earn at the SIC rate (3.07% p.a.), which is higher than what could be earned through a savings account

  • The amount you can withdraw isn't affected by falling markets (so long as there's enough to withdraw)

  • After withdrawal, you have up to 12 months to purchase a home with the funds (can be extended by another 12 months)    

Cons 

  • The scheme is subject to legislative changes with changes in governments - the rules one year may change the next 

  • By salary-sacrificing, you'll have less take-home pay

  • It can be a slow process. The ATO states that the time it takes to release your funds to you will be approximately 25 business days - enough time for you to potentially miss out on your dream home!

  • You have to pay a 20% FHSSS tax if you sign a contract to buy or build before receiving your funds

  • The maximum of $30,000 a single person can contribute may not be enough to cover a deposit, at least if you want to avoid Lenders' Mortgage Insurance (LMI). For example, Domain found that the average house price in Sydney is $1.15 million. A 20% deposit on this is equal to a hefty $230,000, so the scheme can only get you so far.

  • Returns are restricted to the SIC rate (3.07% p.a. at the moment), which is low compared to the performance of many balanced super funds      

Savings.com.au's Two Cents 

Compared to the First Home Owner’s Grant, the FHSSS might not seem like much. A grant could land you a lump sum of $10,000-$20,000 depending on your state, whereas the FHSSS may only boost your deposit by several thousand after a couple of years of salary sacrificing.

On the other hand, the grants are limited to one per household, whereas the FHSSS can be used by two people. Together with a partner, you could be boosting your savings by over $10,000, which is like receiving another grant on top of the one which the two of you are already eligible to receive. 

Given this scheme can be quite complicated, you may want to consider speaking to a financial adviser to see if the FHSSS is the right option for you.

Article first published 10 May 2021 by William Jolly. Updated 17 May 2022.


Photo by Kelly Sikkema on Unsplash   

Disclaimers

The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered. Some providers' products may not be available in all states. To be considered, the product and rate must be clearly published on the product provider's web site. Savings.com.au, yourmortgage.com.au, yourinvestmentpropertymag.com.au, and Performance Drive are part of the Savings Media group. In the interests of full disclosure, the Savings Media Group are associated with the Firstmac Group. To read about how Savings Media Group manages potential conflicts of interest, along with how we get paid, please visit the web site links at the bottom of this page.

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Jacob Cocciolone joined the Savings team in 2021 as a Finance Journalist. Driven by a passion for keeping Australians up to date with the latest financial news and trends, his areas of interest include financial technology, investing, property and motoring.

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