Devil is in detail of government's First Home Super Saver Scheme increase

The FHSSS allows potential first home buyers to make special personal contributions to their superannuation for the purpose of buying their first home. Picture: Shutterstock
The FHSSS allows potential first home buyers to make special personal contributions to their superannuation for the purpose of buying their first home. Picture: Shutterstock

The recent budget announced an increase to the maximum contributions to the First Home Super Saver Scheme (FHSSS) from $30,000 to $50,000.

It was widely, but wrongly, reported that the government had changed the amount a first home buyer could withdraw from their superannuation for a home deposit to $50,000. That's not correct.

The FHSSS allows potential first home buyers to make special personal contributions to their superannuation, in addition to their compulsory super guarantee contributions, with the express purpose of using that money and its earnings for a home deposit.

The scheme was introduced in the 2017-18 budget. The aim is to shorten the time it takes first home buyers to get a deposit together, by allowing them to invest a limited amount in superannuation, where the tax on earnings is just 15 per cent. Currently, contributions are limited to $15,000 a year with a maximum of $30,000 overall.

As always, the devil is in the detail. Yes, it does allow first home buyers to use up to $15,000 a year to save a deposit, and the after-tax return on the money is a guaranteed 3 per cent plus the 90-day bank bill rate, irrespective of the super funds' performance. However, pre-tax deposits into the fund incur a 15 per cent contributions tax, and when the money is withdrawn, both contributions and earnings suffer an exit tax of the individual's marginal tax rate less a 30 per cent rebate.

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The scheme can be useful in some circumstances. For example, Bill earns $85,000 a year and contributes $15,000 a year for two years. The money will lose 15 per cent in contributions tax, which means the amount working for him will be $12,750 a year. At the end of two years his balance should be around $26,000. If he then withdraws it to buy a home his effective exit tax would be 2.5 per cent or $650, leaving him $25,350.

If instead he chose to allocate $15,000 of gross salary for home deposit savings outside the FHSSS, he would have lost $5175 in income tax and Medicare levy up front, and would only be banking $9825 a year, or $19,650 after two years. Bank interest would be negligible.

Using the FHSSS he is better off after two years by at least $5700. It would be particularly useful to a working couple who could contribute $15,000 a year each, boosting savings by $11,400.

The logic behind the changes announced in the budget, however, is somewhat perplexing. Yes, they have increased the total amount that can be contributed to $50,000, but they have left the maximum annual contributions unchanged at $15,000. Given the increase, if legislated, will not start till July next year, any benefit from the change will be three years away at least.

While it's useful for people whose dream of home ownership is at least two years away, it's of little value to those who intend to buy in the next year or so. Also, the money may take a month to become available while applications for withdrawal are submitted and approved. Furthermore, failure to complete the right paperwork when making the yearly contributions could result in the loss of the tax deduction.

The sad reality for governments is that there is no magic bullet when home affordability is under review. The best strategy for most first home buyers is still to use the bank of mum and dad, at least by moving in rent-free with them for a year or so.

Noel answers your money questions

Question

My husband is 74 and I am 65 - we are working part time and not eligible for pension. We intend to retire at the end of this year and my husband will apply for a part age pension. I have $600,000 in super in an account-based pension from which I receive $1800 a month. Will the $600,000 be assessed as asset when my husband applies for pension.

For the past six years we have been putting $500 a week into our son's bank account to help him to save for a house deposit. Do we have to advise Centrelink when my husband applies for pension.

Answer

Superannuation is not assessed until the holder reaches pensionable age unless the money is held in pension mode. This means it will be taken into account when you husband applies for a pension unless you have moved it back to accumulation before then. Based on the information provided you have given around $156,000 to your son in the last six years. The last five years of those payments will be treated by Centrelink as a deprived asset and will be subject to deeming. You need to seek urgent advice about the best way to turn this money into a gift if you are happy with this. Gifting means it will be not assessed by Centrelink after five years - if it's a loan, and left as a loan, it will be assessed for as long as the loan goes on.

Question

My father bought shares prior to September 20, 1985 and therefore were exempt from CGT.

When my father passed away in 2009, my mother inherited the shares and the cost base was reset to the price on the day my father passed. Did the CGT exemption pass to my mother as well?

Does this process then repeat when my mother passes? That is reset to the date that she passes and CGT exemption also continues to those who inherit the shares?

Answer

Your mother would be deemed to have inherited the shares at market value on the date your father died, no CGT will be triggered unless she sells them. When she passes the cost base will remain the same as what it was when she inherited them. So no there is no reset to market value at the date your mother dies as they are now post 1985 assets. No CGT be payable by the beneficiaries of your mother's estate - the CGT liability goes with the shares and is not payable until they are disposed of.

Question

I have my own home, plus $600,000 in assessable assets made up of super and a holiday home. There is a mortgage of $200,000 for the loan I took to buy my own home. Can this be deducted from my assessable assets for Centrelink purposes.

Answer

The loan can only be deducted from the mortgage asset but as the home was exempt, it cannot be offset against the value of the holiday home or any other assets. It would be a different matter if the loan was for the purchase of the holiday home and secured against the holiday home.

Question

My four children, aged between 13 and 20, are all beneficiaries of an inheritance from their grandparents of approximately $200,000 each, to be held in trust (by me as trustee) until each of them attains the age of 25. I would like to see some positive return but mostly I want to ensure the fund is not depleted. Given the need for each individual trust to have a TFN and complete tax returns, can you please suggest the best investment vehicle for each child's fund? The older children have part time jobs so would likely have a tax liability each year.

Answer

The simple solution would be an insurance bond. They are a tax-paid investment, with the bond fund paying tax of up to 30 per cent per annum on your behalf. Franked dividends can reduce the amount of tax paid within the investment bond.

Because the earnings accrue within the fund there is no assessable income to declare on anybody's tax return each year, and if you hold them for ten years or more all proceeds can be redeemed tax-free. Furthermore, they can be transferred without triggering any tax consequences to individual grandchildren at a time you feel is appropriate. The grandchildren could then retain the bond or redeem it in whole or part.

It's best to talk to a financial advisor, who can recommend a bond that suits your goals and your risk profile.

  • Noel Whittaker is the author of Retirement Made Simple and numerous other books on personal finance. Email: noel@noelwhittaker.com.au
This story Devil is in the detail of First Home Super Saver Scheme increase first appeared on The Canberra Times.