The TL;DR version is this: the First Home Super Saver Scheme (FHSSS) was introduced in the 2017 Federal Budget to help Australians save for a home….by allowing them to access their super (kind of). Yaayy, millennials will finally be able to afford real estate…(or will they?!)
So how does it work? Let me explain.
How does the First Home Super Saver Scheme actually work?
You can make voluntary contributions to your super fund of which, a maximum of $30,000 can be pulled out to go towards the purchase of a home. Only your voluntary contributions count (not your employer-paid mandatory super contributions).
Now, there is a ‘maximum’ for First Home Super Saver Scheme (FHSSS) contributions. You can only contribute a maximum of $15,000 per year towards the FHSSS. In other words, you can’t dump in all $30k in one year. The good news is that if you’re saving up for a first home as a couple, you both get to access $30k each, so in total you can access $60k under the FHSSS.
How is the FHSSS different from putting money away in a savings account?
The real benefit of the First Home Super Saver Scheme (FHSSS) is the tax saving that you get. For this you have to understand how super contributions are taxed.
You can make two different types of contributions to your super: concessional (before-tax) or non-concessional (after-tax), and there are limits to how much of each you can contribute each year. What that means is: you can receive some tax-benefits for making voluntary contributions to super. But you can’t just dump a tonne of money into super and get a tax benefit on the whole thing (Uncle Sam isn’t that nice!) So there is a maximum amount that you can contribute each year, on which you will receive a tax benefit. That amount is called your ‘concessional’ contribution (i.e. the contribution for which you receive a tax concession).
When you make a concessional contribution to super, you only get taxed at 15%. Compare this to your regular income tax rate (anywhere between 32 – 45%), and that 15% starts looking like a pretty good discount! That means that you can hit the $30,000 mark a little bit quicker because you’re paying less in taxes to the ATO! Whereas if you’re just putting away your after-tax income, then you’re paying the full income tax rate on it (32 – 45%) instead of the ‘discounted’ rate (15%). Capiche?
To help out my fellow visual thinkers, I drew a fancy little picture:
How much will the tax discount actually save me?
Great question. The government has provided an online tool to help you calculate how much you could be saving through the FHSSS. Access the tool here.
This FHSSS thing sounds too good to be true! What’s the catch?
There are a few things that you need to consider if you’re thinking that the FHSSS could be your ticket to putting together a deposit for a property:
1. It only applies if you want to purchase a home (i.e. not to investment properties!) That means that you must occupy the property for the first 6 – 12 months after purchase.
2. You cannot have previously owned property. If you are trying to access $60k as a couple, then neither your or your partner can have previously owned property. This is strictly an initiative for first-time home buyers only.
3. You can only request a release of the FHSSS funds once. And then within 12 months of the funds being released you must sign a contract for a home (or the construction of a home). If you don’t, you can (a) apply for an extension, (b) return your funds to your super as a non-concessional contribution, or (c) keep the funds and incur a 20% tax penalty.
4. If for some reason you change your mind, or you aren’t able to make the purchase within the stipulated time frame, and the unused funds are returned to your super…then that money will be ‘locked up’ until your retirement (which…isn’t necessarily a bad thing!)
5. It can take some time for your application to be processed and the funds released. If you do a bit of Googling, you’ll find some stories of people who could not get funds released in time, and they lost the deal on the home! So, if you want to use the funds, make sure you apply in time (the ATO says it can take up to 25 business days…which is like, more than a month!)
6. You also want to keep an eye on the concessional contribution cap (which is currently $25,000 per year including your employer’s contribution). In other words, only a maximum of $25,000 per year of contributions will receive the discounted tax rate of 15%. After that, there are no tax discounts. So, what that means is: if you are a high income earner and the mandatory 9.5% your employer pays in super already amounts to (for example) $15,000, then you only have $10,000 worth of concessional contributions left that you can make in that year (if you want to stay within the cap).
Here’s the REAL catch…
I think the real question that most people aren’t asking is: should you even be buying a home to begin with?? The FHSSS only benefits people who want to buy a home (as opposed to an investment property). And even though it’s the ‘Australian dream’, and it’s the ‘normal’ thing to do…I think a lot of people would really benefit from thinking twice (and getting some education!) about whether buying a ‘home’ is a financially sensible idea.
People often get quite sentimental when it comes to purchasing a home (understandably), and this means that people often stretch themselves financially to get their ‘dream home’. This has big problems downstream: mortgage stress, being over-extended, buying a property that was a poor financial asset and has depreciated in value, etc. So, does the FHSSS actually help make property more affordable…or does it just encourage people to stretch their budget even further?