The First Home Super Saver Scheme is a new proposal announced in the Federal Budget that has attracted little publicity. It is designed to help first home buyers save for a deposit more quickly and tax efficiently.
Some commentators feel the scheme has limited appeal, and have focused on its drawbacks, but close examination shows it has potential.
Until now saving for a house deposit has been done from after-tax income. This means it has already been taxed at the young person’s marginal tax rate, most commonly 34.5 per cent, including Medicare Levy.
What if a house deposit could be saved from pre-tax income?
The First Home Super Saver Scheme allows first home buyers to do that. It doesn’t allow the full 34.5 per cent tax to be avoided, but there is a valuable tax cut.
The scheme allows young people to direct up to $10,000 of their pay annually into their super fund, and $30,000 per person maximum, then later withdraw it for a house deposit.
The tax on entry to the super fund is 15 per cent, so most young people save 19.5 per cent tax. This means if the full $30,000 pre-tax income is contributed $25,500 of it is in the super fund earning a return instead of $19,650 when saving from after-tax pay.
The earnings that can be withdrawn for a house deposit will be calculated at a deemed rate rather than the super fund’s actual earning rate. The rate will be the bank bill rate plus 3 per cent, determined by the Reserve Bank.
Currently this rate is 4.73 per cent per annum. If saving outside super it is best to use stable, conservative investments so this is a realistic rate. A comparison of the outcomes using an assumed super contribution of $1,000 shows the scheme’s potential.
Saving outside super sees $655 after tax savings which earns $97.41 over three years. Income tax paid on that is $33.61, leaving $63.80 net. Adding that to the contributions gives total savings for the deposit of $718.80.
Saving in the new scheme inside super sees $850 of the pre-tax $1,000 income saved. At 4.73 per cent this earns $126.41 over three years.
In the scheme’s proposed form there would be no tax on these earnings but there would be tax on the whole amount withdrawn for the home.
The rate payable is the person’s marginal rate less 30 per cent. So our person in the 34.5 per cent tax bracket would pay 4.5 per cent tax or $43.90.
Therefore their amount saved for the deposit would be $932.47 compared to $718.80 if saving outside super.
The final legislation for this scheme hasn’t been passed yet but when it is intending first home buyers should have a close look at it.