The new First Home Super Saver Scheme offers a faster, more tax efficient way to save a deposit for a first home. The draft plan was devised and proposed to the government by two financial planners, Orange local Peter Roan and Julie Matheson of Perth.
To their surprise it was accepted as a smart idea and announced in the 2017 Federal Budget. It came into operation from July 1, 2017.
Until now, saving for a first home deposit has been done from after-tax income. The young person saved from earnings that had already been taxed at their marginal 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 income tax to be avoided but there is a valuable tax reduction.
The scheme allows young people to direct up to $15,000 of their pre-tax pay per year into their super fund, and $30,000 per person overall limit, then later withdraw it for a house deposit. The tax on entry to the super fund is 15 percent, so most young people save 19.5 percent tax on their earnings.
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The earnings that can be withdrawn for a house deposit will be calculated at a deemed rate rather than the super fund’s actual earning rate.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 4.72 percent 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 example contribution of $1,000 of pre-tax income shows the Scheme’s benefit.
Saving outside super gives $655 after tax which earns $92.75 over three years. Income tax paid on that is $32, leaving $60.75 net. Adding that to the savings gives total savings for the deposit of $715.75.
Saving in the new scheme inside super sees $850 of the pre-tax $1,000 income saved. At 4.72 percent this earns $120.36 over three years. There is no direct tax on these earnings but there is tax on the whole amount withdrawn for the home deposit.
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 $43.67. Therefore their amount saved for the deposit would be $926.69 compared to $715.75 if saving outside super.
Intending first home buyers should have a close look at this scheme.