When planning to buy your first home, it’s important to consider all available options to maximise your savings. While personal savings and government grants are often discussed, another valuable tool is the First Home Super Saver (FHSS) scheme.
The FHSS scheme allows you to use your superannuation to save for a deposit on your first home. It works by cycling your savings through your superannuation, reducing your tax burden and, as a result, growing your deposit faster.
In this article, we’ll explore the FHSS scheme in depth to help you understand what it is and how it works.
What is the First Home Super Saver scheme?
The FHSS scheme enables first-time home buyers to make voluntary contributions to their superannuation fund and later withdraw those contributions, along with any associated earnings, to put toward a deposit on their first home. The scheme takes advantage of the tax benefits of superannuation to help you save more effectively.
There are three main components of the FHSS scheme: eligibility, contribution limits, and the withdrawal process. Let’s examine each of these in detail.
Eligibility
To be eligible for the FHSS scheme, you must meet the following criteria:
- Be over the age of 18 to release funds;
- Never have owned a property in Australia (including investment properties);
- Intend to live in the property for at least 6 months of the first 12 months after purchase; and
- Only make one withdrawal under this scheme.
If you’re buying a property with someone who doesn’t meet these criteria, you can still use the FHSS scheme.
Contribution limits
Under the FHSS scheme, you can contribute up to $15,000 per financial year, with a total maximum contribution of $50,000. Contributions can be made from your pre-tax income (concessional contributions) or after-tax income (non-concessional contributions).
Concessional contributions are commonly used as they provide the greatest tax advantage. These are taxed at a lower rate of 15% within your super fund, compared to your marginal tax rate, which can be as high as 47% when the Medicare levy is included. You can make a voluntary concessional contribution via salary sacrifice or a personal deductible contribution.
Non-concessional contributions, on the other hand, aren’t taxed when added to the fund but don’t allow you to reduce your personal income tax.
It’s essential to note that contributions made toward the FHSS scheme are counted towards your regular superannuation contribution caps. Exceeding these caps may result in additional tax liabilities.
Withdrawal process
To access your FHSS savings, you must apply to the Australian Taxation Office (ATO) for a determination and release. The ATO will calculate the maximum amount you can withdraw, which includes your eligible contributions and associated earnings. Once approved, you can withdraw up to $50,000 to use toward your first home.
The released amount will include your eligible super contributions (less a 15% tax on concessional contributions) plus associated earnings. Earnings are calculated based on the 90-day bank bill rate plus 3%.
For voluntary concessional contributions, the withdrawn funds are taxable, with a 30% tax offset. You must include the assessable FHSS released amount in your tax return. The ATO will withhold an appropriate amount of tax and deposit the net balance into your nominated bank account. Non-concessional contributions are released tax-free, as no tax benefit was gained when contributing these funds.
Important points to note
Here are some key considerations when using the FHSS scheme:
- Lodging your determination: You must obtain a determination before signing a contract to purchase a property. This can be done through your MyGov account, linked to the ATO.
- Requesting release: After lodging your determination, you can request a release of funds. This can be done either before signing a contract or within 14 days of signing. It may take up to 20 business days to receive the funds.
- Timeframe for purchase: Once the funds are released, you have 12 months to buy a property. If you don’t purchase an eligible property within this timeframe, a 12-month extension may be granted by the ATO. After 24 months, the funds must either be recontributed to your superannuation or kept, with a flat FHSS tax rate of 20% applied.
- Notifying the ATO of purchase: Once you’ve signed a contract to buy or construct a home, you must notify the ATO within 28 days via MyGov.
- Division 293 tax: If your total income plus concessional super contributions exceeds $250,000 in a financial year, an additional 15% tax may apply to some or all of your concessional contributions, bringing the total contribution tax to 30%.
- Higher future marginal tax rate: If your marginal tax rate is higher when you withdraw the funds than when you contributed, the tax savings you initially enjoyed might be reduced or even offset by the higher tax on withdrawal.
- Assumed earnings: The earnings on the money contributed to super aren’t market-linked. Instead, an assumed return is applied, which provides more certainty around your withdrawal. However, withdrawing during a market downturn could impact your long-term retirement savings.
- Losing access if no property is purchased: If you don’t buy an eligible property, the money will remain in your superannuation until you meet a condition of release, usually when you reach preservation age (60) and retire.
For more detailed information, visit the ATOs website.
The Guided Investor approach
The FHSS scheme can be a very tax effective strategy to build a deposit for the purchase of your first home. We also like it because it can bring discipline to your savings – you can’t be tempted to spend your deposit because its trapped inside of super!
Typically, this is a strategy we will employ in Phase 1 of Wealth Creation where a principal residence purchase is determined appropriate as part of your financial foundation.
