WWN #18 – The Not-So Super Saver Scheme

What’s been happening? The First Attempt

Labour Party’s First Home Saver Account (FHSA) was a 2007 election policy of the Australian Labour Party. It offered benefits such as a variable interest rate, a tax rate of 15% and tax-free withdrawal.

The scheme only lasted until 2014 when the Federal Government decided to abolish it due to the slow uptake by the public. The problem with the scheme was that in order to close the account and access the funds, you had abide by the cumbersome “four year rule” – deposit at least $1,000 every year into the account for at least four financial years. At the time, there was 47,400 accounts with an average balance of about $12,800 each. It was expected that more than 750,000 accounts would be opened but this was never realised.

What Now? Let’s Try Again

On Tuesday night, the 2017 Federal Budget was released and the First Home Super Saver Scheme (FHSSS) was announced. The scheme allows people to put away a maximum of $15,000 per year into their super before tax, up to a total of $30,000.

Contributions paid into super this way will be taxed at just 15% instead of the usual marginal income tax rates (e.g. 32.5% for someone earning over $37,000). Any returns generated on the funds while they are held in super will also be taxed at the low rate of 15%.

The potential tax saving is reduced if you earn more than $250,000 per year where the tax rate rises from 15% to 30%.Earnings can be withdrawn along with the contributions when home is purchased. The withdrawal will be taxed at the individual’s marginal tax rate less 30%. This measure is estimated to have a cost to revenue of $250 million to the government.

Mortgage Choice CEO John Flavell remains sceptical that this scheme will succeed based on past experiences of the similar FHSA scheme. The new scheme has some great incentives but its main failing is that it doesn’t allow home buyers to save a big enough deposit. The ever-rising prices in the nation’s capitals means that a $30,000 deposit is not going to enough. According to Superfund Partners director Mark Beveridge, the average person would only save about $2500 extra a year. If you are a couple and save the maximum amount over two years, the total benefit is still less than $10,000.

On the other hand, some prospective buyers have backed the idea on the basis that it was better than another suggestion to allow first home owners to directly draw out funds from their existing super for a deposit.

For an indication of the potential benefit of the FHSSS to you, the government has prepared a handy estimator – click here.

First Home Super Saver Scheme (FHSSS) – Key Facts
Maximum contribution amount $15,000/year reaching a total of $30,000
Maximum term Unrestricted
Contribution Tax Rate on Deposits and Related Earnings 15%
Effective Start Date (Contributions) July 1, 2017
Effective Start Date (Withdrawals) July 1, 2018
Withdrawal Tax Rate Marginal Income Tax Rate Less 30%


What’s Next?

The FHSSS appears to be one of many “crowd-pleasers” in the budget – politically friendly measures that are not particularly meaningful.

As noted earlier, initial feedback is critical of the new scheme’s success and the potential benefit in tax savings may not be significant enough to convince many prospective first home buyers to implement the scheme. It is also argued that putting more money into borrowers’ pockets without increasing supply will likely to add to home price pressures.

There is a great deal of uncertainty ahead as any changes outlined in the Federal Budget (including this measure) must be passed by both the House of Representatives which is controlled by the government and the Senate. This means that any proposed changes may not necessarily become law.

References:
https://www.domain.com.au/news/federal-budget-2017-sorry-firsthome-buyers-this-isnt-the-budget-you-were-hoping-for-20170509-1nxvdg/http://www.theherald.com.au/story/4653576/federal-budget-2017-five-housing-changes-to-know-about/?cs=3968https://www.commbank.com.au/guidance/economy/federal-budget-2017–affordable-housing-201705.htmlhttp://www.dailytelegraph.com.au/news/national/federal-budget/the-first-home-super-savers-scheme-wont-get-traction-industry-experts-say/news-story/01605e56fe59032e4c0a2204af98c241http://www.news.com.au/finance/superannuation/notsosuper-home-deposit-scheme-will-leave-average-aussie-just-2500-better-off/news-story/10883f75182084c0eddfe95cffce8a92
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