By Thomas Kidd
The First Home Super Saver Scheme (FHSSS) was introduced in 2017 to help Australians save more effectively for their first home. The scheme allows first home buyers to reduce tax on their savings, as well as access tax-advantaged investment earnings, by contributing their home savings to super. In this article, we break down the basic mechanics of this scheme, to show what a difference it can make.
Who is eligible?
Australians who are 18 years of age or older can take advantage of this scheme. To be eligible, you must have never owned a property in Australia, including investment or commercial properties. Eligibility is assessed on an individual basis. So if you are eligible for FHSSS, but the person you are planning to purchase a home with isn’t, it doesn’t prevent you from applying.
Saving on tax
Let’s use an example to show how the scheme helps you save tax: take an average 30-year-old Australian, earning $70,000pa in the 2022/23 financial year. This person wants to put $10,000 aside to save for a home. If they put it in a savings account, the full $10,000 sits there, and will earn a small amount of interest each year. But say they put this amount into their super under the FHSSS and claim a tax deduction on that contribution. The contribution has 15% tax deducted, so only $8,500 stays in their super account. But by doing so, they reduce their taxable income by $10,000; so while $1,500 was taken out of the amount put into super, this person will receive a tax return of $3,550. The net effect of this is a tax saving of $2,050, as demonstrated in the table below:
| |
Without FHSSS |
With FHSSS |
| Earned income |
$70,000 |
$70,000 |
| Tax deductible super contribution |
$0 |
$10,000 |
| Taxable income |
$70,000 |
$60,000 |
| Gross tax payable |
$13,217 |
$9,967 |
| Low income tax offset |
$0 |
$100 |
| Tax payable |
$13,217 |
$9,867 |
| Medicare Levy |
$1,400 |
$1,200 |
| Contribution tax |
$0 |
$1,500 |
| Total tax |
$14,617 |
$12,567 |
| Total tax saved with FHSSS: $2,050 | ||
Note: Figures above are calculated using tax rates applicable in the 2022/23 income year.
Members can also make after tax contributions toward the FHSSS. While this may not generate any personal income tax savings, 100% of after tax contributions can be released under the FHSSS. This approach may be suitable for lower income earners or people who have maximised their pre-tax contributions.
How much can you save
At time of writing, the maximum amount that can be contributed towards the FHSSS in any given financial year from July 2017 onwards is $15,000, and the maximum total amount is $50,000. This amount is the gross amount of contributions, so keep in mind that if a tax deduction is claimed as described above, the actual amount released will be less.
Investment earnings
While the tax savings of the FHSSS are great, it doesn’t end there. The funds held in super are invested just like the rest of your super; however, the government applies a deemed rate of earnings to amounts released under the FHSSS, rather than the actual investment earnings. This deemed rate is set to the ‘Shortfall interest charge’, which is updated on a quarterly basis. You can find the current rates on this page. Since the FHSSS began, this rate has usually been somewhere between 3-5% - suffice to say that this is more generous than most savings accounts or term deposits will offer.
It's important to note that if the actual return on your super investments is less than this deemed rate, drawing out your funds may mean inadvertently dipping into your retirement savings. With this in mind, you should consider your investment timeframe and risk when using this scheme.
Releasing your funds
When you’re ready to buy your first home, you should apply for an ATO determination of your FHSSS amount before signing a contract; you will have 12 months after your application to purchase a home, plus an extension of 12 months that is applied automatically.
You can select the amount from contributions made that you would like to release (up to the allowable limits) and the ATO will calculate the deemed earnings. The concessional amount of funds released (i.e. funds that have had a tax deduction claimed, plus your deemed earnings) will be included in your earned income for the year, but with a 30% tax offset applied. Any non-concessional amounts released are not treated as income.
Using our example from the previous section: if the person releases the full eligible amount, they will receive $8,500 (for simplicity we’ll ignore the additional earnings.) This is included in their tax return, but with a tax offset of $2,550. The total additional tax that they would end up paying is about $382.
What if you don’t buy a house?
If you don’t end up buying a house with your released funds, you have two options:
Re-contribute the funds to super. This will retain the tax savings that the scheme has afforded you, but the funds will no longer be accessible for buying a home; they remain in super until you reach a condition of release (generally this means retirement.)
Hold on to the funds. If you elect not to re-contribute the funds to super, you will pay a flat 20% tax on the concessional amount released. This effectively cancels out the tax benefits of the scheme. Using our earlier example, the $8,500 released would pay tax of $1,700; adding this to the $382 paid upon release brings us to a total of $2,082, which is $32 more than the initial tax saving we calculated. While it’s obviously not ideal, this demonstrates that backing out of the FHSSS can come at fairly minimal cost.
Maximising your benefits
If you really want to get the most out of the FHSSS, you should consider the following:
Start early. Even if it’s a small amount, using the FHSSS to start saving for a home early can be particularly advantageous, since the deemed earnings accumulate over time.
Use salary sacrifice. If you’re committed to your savings goal, you can use salary sacrifice to streamline the process. This can have advantages in both increasing your time invested and removing inefficiencies in the tax treatment of your savings.
Have SMART goals. In particular, this means having a good idea of how far down the track you want to buy, as well as having realistic expectations of what you can afford. This can help you set savings targets and consider the most effective way to use the scheme.
Thomas Kidd in an authorised representative of Alliance Wealth Pty Ltd. (AR: 001292328)