After missing out on a free education, tax-free property windfalls and the chance to pour tens of thousands of dollars into super almost tax-free, young Australians have finally been thrown a tax break bone.
Sure, it’s more chicken wing than femur. But it’s worth considering for anyone looking to buy a home in coming years.
The First Home Super Saver Scheme unveiled on Tuesday night is expected to deliver first home savers a total tax break of $50 million in the coming financial year, rising to an annual break worth $70 million in four years.
A first home saver who earns $60,000 a year and ploughs $10,000 a year into the scheme for three years will be about $6000 better off than if they’d simply put their money into a bank deposit – the typical first home buyer strategy.
If that doesn’t sound like much moolah to you, you’re probably wasting too much money on smashed avo.
The scheme is unlikely to have a noticeable impact on boosting home ownership rates. By putting more money into borrower’s pockets without also increasing supply, the measure will likely add to home price pressures.
But compared to recent price movements, it’s just a drop in the ocean.
Sydney median dwelling prices jumped $120,000 over the year ended April to $860,000 – a weekly increase of about $2300 a week. Melbourne prices also leapt $100,000 over the year to $650,000 – a little under $2000 a week.
By topping up first time buyer accounts by about $2000 a year, ScoMo’s FHSSS keeps them ahead of the Sydney and Melbourne property markets by about a week.
Still, $6000 is $6000.
So how can first home savers get a bit of that action?
From 1 July 2017, first home savers can instruct their employer to deposit money from their pre-tax income into their super account, where it will be taxed at just 15 per cent instead of the usual marginal tax rates that would apply, currently at 19, 32, 37 and 45 per cent (plus the Medicare levy).
For someone earning between $80,001 and $180,000 on the 37 cent marginal rate, they get a tax saving of 22 cents in the dollar. Instead of pocketing just $6300 in after-tax income from the last $10,000 they earn, they’ll get to keep $8500 and put it into super.
CLICK HERE TO USE THE FHSSS ESTIMATOR AND FIND OUT HOW MUCH YOU COULD GET
Earnings generated on this money while in the super account will also be taxed at the low rate of 15 per cent, compared to paying the full whack of marginal tax on interest earned on bank savings.
The scheme maxes out at a total of $30,000 in contributions per individual and the maximum that can be salary sacrificed in any year is $15,000.
When the time comes to live out the great Aussie dream and buy a home, savers will pay tax on their withdrawal amount at their marginal rate, less 30 percentage points. For a person on the 37 cent rate, they pay just 7 cents. That’s not quite the tax-free withdrawals enjoyed by over 60s from super, but it ain’t bad.
All up, a person earning $100,000 a year who puts $10,000 a year into the scheme for three years would end up with $24,777 to put towards their home deposit, versus just $18,586 if they put their money in a bank deposit. They’d end up paying an average tax rate of 17 per cent, versus 38 per cent.
On the face of it, that’s worth doing.
But there are several things to consider first.
First, and obviously, you have to have the cash to spare. While for higher income earners, this may be a good forced-savings method, low income earners are less likely to have the spare cash. If they do, however, it will be worthwhile, their contributions being essentially tax-free thanks to the low income super tax offset.
Second, you may not be able to squirrel away as much as you think. Importantly, the usual caps on concessional contributions to super apply. From 1 July this year, that’s a maximum of $25,000 in contributions a year – both voluntary and compulsory – which attract the low tax rates. Anyone earning $106,000 or above will already have compulsory contributions of $10,000 and more a year, meaning they can put in less than the scheme maximum of $15,000 a year.
Another kink is that if you earn more than $250,000 you pay an extra 15 cents on your contributions, bringing tax to 30 cents. I know. Cry me a river.
It’s also important to know that, once in, your money can’t be withdrawn for other purposes. If you do not ever buy a home, the money has to sit there until you reach retirement age. If you do decide to buy, however, you can access the funds after a year.
It’s not entirely clear, however, how this will work.
While super funds hold your money, the scheme is administered by the Tax Office, which must calculate how much you can withdraw. How will this work? Will buyers need to show the ATO proof of purchase before accessing funds? If so, how can they get approved for a loan?
A final kink in the scheme is the fixed rate of return savers will get on their money.
To provide certainty, and to save super funds the hassle of calculating actual individual returns, money put into the scheme will be deemed to have returned 3 per cent plus the 90 day bank bill rate each year. Currently, that’s around 4.78 per cent.
If your super fund returns more than that, that excess will just have to stay in your retirement nest egg.
If your super fund performs worse, or even shrinks, the extra amount needed to pay out the deemed rate will be deducted from your retirement nest egg – possibly at a time of depressed values which is exactly when you should leave the money there to recover.
Investing in shares, which super funds do, is best done over the long run, and savers risk falling foul in the short term.
Overall, however, history suggests savers should enjoy a higher average returns on their money in super than a typical bank deposit rate.