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Written by Hudson adviser Michal Park
You’re moving into your new home; corks are popping and there are smiles all around – classic advertising that for many seems unattainable.
Although many Australians may want to bash the banks over tighter home lending criteria, it’s the bank regulator, the Australian Prudential Regulatory Authority (APRA) that has set these requirements to address the risks in the mortgage market. Low deposits were increasing the risks carried by lenders.
A poll conducted by MoneySmart showed that 43% of Australians don’t save. Of the number who are saving, only 16% are doing it comfortably.
The reasons are varied, but for the most part, modern families are over-burdened with commitments and more pressing priorities. Meanwhile, home ownership slips further away.
But fear not!
In December 2017, the First Home Super Saver (FHSS) Scheme was legislated.
In a nutshell, the scheme allows you to save your first home deposit within your complying super fund; meaning that you can take advantage of the tax and savings benefits unique to superannuation.
If it seems too good to be true, it’s not – but it could be. You’ve heard the term, ‘conditions apply’? Well this is no exception.
Read the fine print: the FHSS scheme is strictly regulated – after all superannuation’s ultimate goal is to preserve your savings until retirement.
Further, not everyone is eligible. To qualify, you must not have owned property in Australia; have never previously requested an FHSS release; and promise – on pain of Tax Office strife – not to use FHSS money to purchase a non-occupiable property, motor home, houseboat or vacant land. And not all super funds will be permitted to participate in this scheme.
So, let’s see how the figures stack up.
Say you’re putting $500 per month into a savings account earning around 2% per annum interest. You’ve paid tax on that money, at your marginal rate, so already you’re behind. But the kicker is that you must pay tax on the 2% earnings as well.
Not floating your boat?
Taking care not to exceed your annual contributions cap, consider contributing the same monthly $500 to an FHSS Scheme. Post-tax contributions to super are subject to a flat 15% contributions tax – and no tax on the earnings. Those choosing to salary sacrifice their contributions can use pre-tax money.
To access these funds for a deposit, you must wait until after 30 June 2018 and apply to the Commissioner of Taxation. You can apply for the release of eligible FHSS contributions up to $15,000 over one financial year, to a total of $30,000 over all years. You then have 12 months from the release date to purchase your first home.
Accumulated savings not used for your deposit will remain in your super fund, contributing to your long-term retirement plan.
There may be tax implications so seek professional advice before making any decisions.
The FHSS scheme may not be for everyone as some people feel that tying their cash up in a super fund is too restrictive; they’d prefer to maintain access to their money. Since the scrapping of the home saver account scheme, savers looking for cash accessibility and flexibility can consider a regular savings plan or a term deposit.
It all comes down to what suits you and your lifestyle. Chat with your Hudson adviser and work out the best way to take your first step towards your first home… and that bottle of bubbly!