Do you find it hard to save money?
Need help with 'not spending the deposit' — while you're still saving the deposit?
Relax. This is a common frustration (and temptation) we all face, so perhaps the government's little known new First Home Super Saver (FHSS) scheme may be worth learning more about.
Tell me the basics - how does it work?
When it comes to saving for your first home, super probably isn’t a saving or investment option that usually springs to mind.
- Generally, super can only be accessed once you’ve retired or met another ‘condition of release’, which could be a long way down the track.
However, under the First Home Super Saver (FHSS) scheme, you may be able to make additional contributions to your super (those are separate and above the compulsory super paid by your employer on your wages - called SG), and you may be eligible to withdraw these amounts, plus their associated earnings to put towards a deposit on your first home.
Below, we highlight the key steps you need to follow.
First Home Saver Super (FHSS) scheme
Why use your Super to save?
There are a few potential benefits to using super to save for a home deposit, including:
- Once your savings are in your super fund, they stay safely locked away from the temptation to spend them until you're ready and able to buy your first home and need to withdraw those funds to use as part of your deposit. ;)
- Earnings in super are taxed at up to 15% (and are concessionally taxed when you make a withdrawal from super under the scheme).
- Earnings on investments or bank accounts in your own name are taxed at your marginal tax rate (MTR) which could be up to 47%, and depending on the type of super contributions you make, these amounts may reduce your assessable income for the year and help reduce your tax payable too.
- For small business owners and people in high litigation classes of employment, like engineers, doctors and lawyers, funds in your Superannuation are usually considered 'shielded from any potential future Bankruptee Trustee.
Insight: Overall, the tax effectiveness of the scheme may free up more of your hard-earned funds and increase the amount you can save (and its earnings) for that first home deposit.
Comparison: Saving a First Home Deposit Fast
Who is eligible to use this super saving scheme?
To be eligible for the FHSS, you must meet certain conditions, including:
- be a member of an Australian Superannuation fund, and
- be aged 18 years or older at the time you apply to withdraw the funds,
- have not ever owned or had an interest in Australian real estate (including residential, investment and business properties), and
- make voluntary super contributions up to the set super contribution cap limits.
Never owned property (why never means never)
As this scheme is targeted towards first home buyers, it's a requirement you haven't previously owned a property.
This includes an 'interest in any property' – not just a property that was treated as a main residence. Therefore, a current or previous interest in property, including an investment or commercial property, will make you ineligible to use this scheme. The good news is, if you’re purchasing the property with another person, eligibility is determined individually.
Need to know details
This little-known scheme lets you use your super account as a savings vehicle.
- It can save you on tax, but it can be complex and you'll need to start planning well ahead of buying a house to make the most of the scheme.
- The tax savings are designed to help you save faster, as the FHSS scheme allows you to save for your first home inside your super fund and benefit from the investment returns it may make.
You can read more about the different types of super contributions and contribution caps at ato.gov.au
You should carefully consider if this is the best option for your circumstances and whether you need financial advice before commencing saving in your super. The ATO will estimate your income for the year in which you withdraw the funds and will withhold tax from the amount paid to you at your estimated tax rate.
What’s the downside?
- If you change your mind after you’ve contributed to super and no longer intend to purchase a home, the money you’ve contributed to super won’t be accessible and will stay locked inside your super fund, until you meet a future condition of release.
- If you change your mind after the funds have been released, you’ll need to either recontribute the money to super or pay additional FHSS tax.
How Voluntary Super Contributions are tracked
There is no need for you to notify your employer, super fund or the ATO before making contributions for FHSS purposes. Contributions you make for FHSS purposes are not accounted for separately in your super account(s), and you're not required to use them for the FHSS scheme. If you end up not accessing them under the FHSS scheme, they remain part of your super interest. - ATO
Applying to have funds released when you're ready to buy your first home
How to withdraw funds using the FHSS Scheme
If you are eligible and want to withdraw money from your super for a first home deposit, here's what you need to do.
- Start making voluntary contributions (or salary sacrifice contributions) to your super account.
- Use your myGov account to apply to the Australian Taxation Office (ATO) for a FHSS determination to get certainty on the amount of funds you will be eligible to withdraw for your first home deposit.
- When you receive your determination, apply to the ATO to release these funds from your super
- The ATO will tell your super fund to release your super contributions.
- Your super fund will send the ATO your money.
- The ATO will withdraw tax, then pay you the remaining amount.
- You get a home loan and buy (or build your first home) within 12 months from the date you made your FHSS release request.
- You notify the ATO within 28 days of entering into the purchase (or build) contract.
The ATO says it can take as many as 15-25 days to receive your money from them, so it's important you are not in a hurry to put down the deposit.
What happens if you don't use these funds?
If you still haven’t purchased a home (or signed a construction contract) within that timeframe, you’ll need to either:
- re-contribute the funds back into your to super, as a non-concessional contribution for which you can’t claim a tax deduction and notify the ATO, or
- pay FHSS tax of 20% on the assessable amount that was released to you, which is in addition to any tax payable on the withdrawal.
What next?
To find out more about the FHSS and to understand the different ways you can use your super fund to save your first home deposit, and the benefits it may provide to you, you always seek financial advice first and visit ato.gov.au.
Remember: As a First Home Owner to be, you may also be eligible for other state-based stamp duty concessions or any first home buyer grants, and you should seek further information from the State Revenue office in your state or territory.
How we can help
Helping people find a strategy that works well for their strengths is an important part of supporting them to learn new larger money skills, so they can get their foot on the first rung of the residential property ladder. We can help you better understand your options and when you're ready to withdraw your saved deposit we can help you navigate the ATO withdrawal application process.
Contact us for a confidential chat about your needs.
Technical stuff (and why you need financial advice)
- Estimated tax rate: If the ATO can’t estimate your income for the year and therefore your MTR, they will withhold tax on the assessable amount at 17% and any adjustment will occur when you submit your tax return for the year.
- Associated Earnings: Investment earnings are deemed to accrue at a set rate known as the shortfall interest charge (SIC) which is 6.46% pa for April- June 2023. This rate fluctuates over time.
- No previous property ownership: The ATO may allow exceptions under financial hardship provisions, including where you’ve previously lost a property due to divorce, loss of employment or a natural disaster.
- Age requirements for entry into the scheme: When an amount is released under the FHSS scheme, you must be aged 18 or over. There is no restriction to making voluntary contributions to superannuation under 18 which may be accessed under the scheme after reaching age 18.
- Maximum release amount: The FHSS maximum release amount takes into account the $15,000 limit from any one year and the $50,000 total limit to the total contributions across all years, before adding the associated earnings (ATO).
Self Managed Super Fund Advice-on-Demand
There are three main stages of managing a Self Managed Super Fund (SMSF) and depending upon what part of the journey you're in, your needs may be very different.
We find people new to their SMSF journey are usually at one of three main stages;
- Establishment - Setting up their SMSF
- Administration - Annual Tax and Auditing
- Investment Advice - Documenting the SMSF's investment strategy and managing fund liquidity risks, for lumpy investment assets.
The Sole Purpose Test
All SMSFs need to comply with the sole purpose test, which requires the super fund to be run for the sole purpose of providing retirement benefits for members. Your SMSF needs to meet the sole purpose test to be eligible for the tax concessions normally available to super funds.
The sole purpose test applies to all super funds, not just SMSFs.
- The sole purpose test is essentially related to providing retirement or death benefits for, or in relation to, SMSF members.
- Specified ancillary purposes, which relate to the provision of benefits on the cessation of a member’s employment and other death benefits and approved benefits not specified under the core purpose.
You can read more about how it relates to SMSFs at the ATO website here.
Our Focus
An SMSF allows you to actively manage your own superannuation investments for your retirement. While SMSFs can potentially provide members with far more control and flexibility than big super funds, that doesn’t mean it’s open slather. Breaking the rules can be costly and without ongoing professional advice, most Trustees would struggle to maintain an SMSF.
At Sapience Financial, we specialise in post-establishment SMSF investment advice.
- We focus on SMSF liquidity insurances for funds that may have purchased 'lumpy' investment assets, like property, and
- We focus on maintaining accurate SMSF investment strategy documentation after an SMSF fund has been established.
Ongoing Advice
Sapience provides advice-on-demand services for SMSF Trustees who don't necessarily wish to pay an annual ongoing retainer fee for a financial adviser, but who wish to engage our professional services on a fee-for-service basis, using our advice-on-demand service.
Regulation 4.09, of the SIS Regulations, asks you to consider diversification, not to be diverse. Similar to the insurance consideration, an SMSF is not required to hold life insurance. It just has to consider whether it should. The ATO asks trustees to have their investment strategy ready for their SMSF's auditor for their next audit.
SMSF Trustees need to consider diversity in their Investment Strategy, consider the fund's Liquidity Needs each year, and evidence to their SMSF Auditor that they're running a complying fund and up-to-date with all regulation changes.
- For SMSF clients using our Investment Strategy and Documentation service, we provide clients with meeting minutes for the Trustees to sign and file for their auditor's review as necessary.
- For SMSF clients using our Liquidity Insurance Management service, we provide clients with meeting minutes for the Trustees to sign and file for their auditor's review as necessary.
How we can help
Having a clearly documented strategy for your SMSF is an important part of providing for yourself and your family into retirement while you plan to increase your investment returns to sustain your retirement. Managing its ongoing updates and refinements, while making sure the fund's liquidity needs, enables it to meet the retirement needs of the SMSF members.
Contact us for a confidential chat about your SMSF needs.
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