First Home Super Saver Scheme in 7 Steps

The government announced the creatively named First Home Super Saver Scheme (FHSS) for first-home buyers in mid-2017, and since then I’ve been mulling it over. With the easing housing market and constant expectation of having to move (been renting in the same house for over 6 years, but it’s inevitable I’ll be booted some time!), I’ve been thinking more about moving some cash into housing (see dreams below). I’ve figured out the 7 main steps needed to make it work.

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The scheme itself is a little confusing, but this is basically what I’ve figured out the run-down to be:

  1. You need to have not bought any property yet!
  2. The contributions to your super fund can be made up of salary sacrifice (concessional) and/or post-income tax contributions aka personal savings (non-concessional), up to a maximum of $15,000 per year and overall total of $30,000.
  3. Salary sacrifice contributions must be within the concessional contributions limit which is $25,000 per year (also includes you employer’s super payments) – to calculate your maximum additional contribution you can make via salary sacrifice you need to minus your employer’s yearly super payments from the $25,000 – for me, my employer contributes about $8000/year (9.5%), so I can add the full FHSS maximum of $15,000/yr via salary sacrifice and come under the contributions cap.
  4. Your salary sacrifice (concessional) contributions are taxed at 15% when they enter your super fund (but you avoid income tax).
  5. When withdrawing, you can take out 85% of your concessional (salary sacrifice) contributions as they have been taxed 15% and 100% for your non-concessional (post-tax income) contributions, up to the $30,000 PLUS deemed earnings. Deemed earnings are calculated using the ‘deemed rate of return’ which = 90-day Bank Bill rate + 3% (currently around 4.8% – double most HISA!).
  6. You pay some tax (taken out by ATO before it gets to you) when you withdraw the money. The tax is based on FHSS assessable income, with a 30% tax offset (eg. if tax bracket 32.5%, you pay 2.5% tax – obviously higher for higher earners):
    • For non-concessional (after-tax) amounts: tax is only paid on deemed earnings, so assuming 32.5% tax bracket and only non-concessional contributions made:
      • Tax paid = $30,000 x 4.8% (deemed interest) x 2.5% (tax) = $36 – this seems low but remember income tax has already been paid on this before it was contributed (around $14,000 at 32.5%)
      • Total withdrawal = $29,964
    • For salary sacrifice (concessional) amounts: assessable income for the scheme = concessional contribution amount + deemed returns. So total tax on withdrawals using salary sacrificed $30,000 (assuming basic interest formula and 32.5% tax bracket):
      • Tax paid = [$25,500 (ie. 85% of concessional contributions) + $25,500 x 4.8% (deemed interest)] x (2.5% tax)  = $668
      • Total withdrawal (after two years) = approx. $24,830  *actually slightly higher ($25,292) as interest is compounded

7. You then “have up to 12 months to sign a contract to purchase or construct a home”. There are rules and penalties for not using the withdrawals to buy a property within 12 months (time extensions can be applied for) – see here for more details.

For most capital cities, $25-30,000 isn’t much of a deposit, but it is definitely a start and has some significant tax advantages, so I’m sold!

<<VERY IMPORTANT NOTE FOR HECS-HELP REPAYERS USING SALARY SACRIFICE>>

As your taxable income will be reduced, your employer will reduce the amount of HECS-HELP tax it takes out of your pay. HOWEVER, your final HECS-HELP payment is a percentage of your assessable income = taxable income + concessional contributions, with the percentage depending on the threshold you fall into*. So you will end up with a tax bill at the end of the financial year to make up the difference**. This will be substantial if you are salary sacrificing the maximum $15,000 per year.

  • For example:
    • If earning $80,000, you will pay 6% back as a HECS repayment = $4800
    • BUT if you salary sacrifice $15000, your employer will pay back at the 4.5% rate (as your income looks like it is only $65000) = $2925
    • Which means you will have additional HECS repayment bill of $1875

*These thresholds are changing from 2018/19, so everyone will be paying more HECS back

** This is also true for the Medicare Levy Surcharge (MLS) for high income earners ($90,000 individual or $180,000 couple), but not for the Medicare Levy which is just based on taxable income

MY PLAN

a. Set up salary sacrifice contributions totalling $15,000/year for two years – $577/fn

b. Set up a automatic transfer from my salary into a separate bank account in order to cover the HECS payment difference at the end of the year – around $77/fn

 

More details

BASIC INFO: https://www.ato.gov.au/Individuals/Super/Super-housing-measures/First-Home-Super-Saver-Scheme/

CALCULATOR (for salary sacrifice): http://budget.gov.au/estimator/

ARTICLES:

https://www.smh.com.au/money/tax/its-all-about-the-tax-why-the-first-home-super-saver-scheme-adds-up-20180116-h0j3qv.html

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