As most people who are trying to buy their first home will be aware, the latest Federal Budget included a new scheme to help first home buyers save their deposit. The First Home Super Savers Scheme is designed to enable first home buyers to deposit funds into a Superannuation fund from their pre-tax earnings, thereby reducing the tax they pay on these earnings.
Given that there have been similar schemes in the past that failed to attract a great deal of take-up, the question for many people is whether this latest scheme is worth pursuing. So here’s a few tips that you might find helpful.
The tax advantages for first home buyers
As we touched on above, first home buyers can ask their employer to put money from their pre-tax income straight into a super account. As a result, these funds will be taxed at 15%, instead of the current marginal tax rates of 19% to 47%, (plus the Medicare levy), depending on income.
As well as attracting a lower tax rate on the contribution, investing in the scheme will also lower your taxable income, and therefore lower the tax you pay on your remaining income.
It is also worth remembering that when you are ready to withdraw your funds, the plan is to tax your withdrawal at your marginal tax rate minus 30 percentage points.
Where will your first home be??
It is important to remember that there is a contribution cap of $30,000 on the First Home Super Savers Scheme. It’s benefit to you will depend on the value of the property you are buying, and therefore where you are buying.
For example, if you are trying to buy in Sydney where the median house price is above $1 million, (and therefore the average 20% deposit is above $200,000) your contribution of $30,000, which will end as under $25,000 after tax, will not make much impact on your deposit.
If, however, you are buying in a city where values are lower, the impact is greater. For example, if you are buying your first home in Tasmania, where median house prices are below $400,000, you can clearly make a much larger impact through this scheme.
Single vs couples
Don’t forget that the contribution cap for this scheme applies per person. This means that two members of a household can pool their contributions to just under $50,000 after tax, giving couples a real advantage.
What happens if you don’t buy a home?
One of the catches to this scheme is that once you deposit money into an approved fund, you can only withdraw the funds for the purpose of buying a property. If you don’t use it to buy a property, your money will remain in the super fund until you reach retirement age.
Rules on fixed returns
Another rule for the First Home Super Savers Scheme governs the returns you receive. Any funds that you deposit into the scheme must earn a defined return of 3% over 90-day bank bill rate per annum. On current figures, that would earn you close to 4.8%. So, if your super fund achieves a better return than this rate, the additional earnings must stay in your super account until your retirement. If a lower return is achieved, the extra amount will be deducted from your retirement nest egg.
More advice on property
Keep in mind that this information is purely an outline of some of the features of the new First Home Super Savers Scheme. If you are considering buying your first home, we would recommend seeking qualified expert advice to ensure you fully understand all the requirements and rules. If, however, you are thinking of selling your first home and moving to your second, or third, or….be sure to get your copy of our free booklet, “Fatal Real Estate Traps Exposed”. while you’re here.