Buying a first home is never easy, but as of 1 July 2018, first home buyers will be able to use the lower tax environment of the super system to save some of their deposit.
Younger clients are interested in the new First Home Super Saver Scheme (FHSSS) to build their deposit, but there are some tips and traps they will need help navigating.
Saving a SUPER deposit
First home buyers can use both voluntary concessional and non-concessional contributions up to their contribution caps as part of the FHSSS. When ready to buy, they apply for release of eligible FHSSS contributions up to a maximum of $15,000 from any one financial year and a maximum of $30,000 in total across all years.
The maximum FHSSS release amount includes 100% of eligible non-concessional contributions and 85% of eligible concessional contributions and associated earnings. These associated earnings are calculated using a deemed rate of return based on the 90-day Bank Bill rate plus 3%.
Once released, FHSSS amounts must not be used to purchase a premises not capable of being occupied as a residence, a houseboat, motor home or vacant land, explains John George, ATO’s Director, Superannuation, Individuals Experience.
“You also can’t have previously owned a property, including commercial and investment properties,” he says. The only exception is if the contributor has suffered financial hardship resulting in the loss of their previous property.
Tracking the savings
As they are saving for their home, FHSSS contributors can check the balance of their accumulated savings and earnings by applying to the ATO for a determination. When requesting this determination, the FHSSS contributor will be asked to declare they will not be claiming a tax deduction for their contributions at a later date and such claims will face financial penalties.
“When you are happy with the amount, you can apply for a release of the amounts and the ATO will formally request the amounts from the super fund. Funds have a requirement to release it to the ATO within 10 business days,” explains George. Prior to the ATO forwarding the funds, it will withhold tax at the individual’s marginal tax rate less a 30% tax offset. The FHSSS contributor will also receive a Payment Summary showing the assessable amount for inclusion in their tax return.
One time only
A key point advisers need to stress to clients is that before requesting a release, they must make all their planned FHSSS contributions and they agree with the amounts shown in their ATO determination.“This is a once only opportunity and once you lodge a release request you can never ask for a release again. You can’t go back for more or change your mind,” notes George.
After release, first home buyers have 12 months to purchase or construct their home and must notify the ATO. They are also required to either live in their new home or intend to live in it for at least six months of the first 12 months they own it.
“If you don’t use the money within 12 months, you can apply for a 12-month extension, or recontribute the assessable amount back into your super fund and notify the ATO,” says George.
“If the individual keeps the money and doesn’t buy a home, the ATO will apply the 20% FHSSS tax on the assessable released amount so they don’t receive a financial advantage.”
Traps and considerations
For advisers, it is vital to check the client’s contribution limits and the potential implications for other government benefits. “If the client is using a salary sacrifice arrangement, you need to be mindful as they could exceed their concessional contribution cap,” warns George.
Another point to note is that some super funds – such as constitutionally protected or defined benefit (DB) funds – may not be appropriate. “Some funds may not be able to release FHSSS contributions. However, hybrid funds with both DB and accumulation sections may be able to make a release through the accumulation side.”
Other traps are the potential withdrawal fees and charges made by the super fund and the possible impact on insurance cover.
For SMSFs, there are no additional administrative or reporting issues if their members wish to make FHSSS contributions. “The ATO is administering the scheme and is the linchpin, so the SMSF just needs to be able to receive voluntary contributions and action a release authority the same way it does for anything else,” explains George.
The FHSSS is separate from state-based first home buyer packages. “Individuals could be eligible for both, but they need to check with the relevant government schemes as they may have different eligibility conditions.”
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