Young people keen to save a deposit for a first home now have only two weeks left to get some saving happening this financial year using the new First Home Super Saver Scheme. This new scheme offers a faster, more tax efficient way to save a deposit for a first home.
Until now saving for a first home has been done from after-tax income. Young people saved from earnings that had already been taxed at their marginal rate, usually at least 34.5 per cent with Medicare Levy. Now they can save from pre-tax pay.
If income is between $37,000 and $87,000 their marginal tax rate is 34.5 per cent. Contributions from pre-tax pay avoid that but 15 per cent tax applies on entry to the super fund. So most first home buyers save 19.5 per cent of each dollar put in. Those earning above $87,000 save more.
The Scheme allows each young person to put up to $15,000 of their pre-tax pay per year into super, and $30,000 overall limit. They can withdraw it for a home deposit any time from July 2018 on.
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 for those saving after paying 34.5 per cent tax. How can a person put up to $15,000 of pre-tax pay into super this year when there are only two weeks left? Another new rule this year allows anyone including employees to make super contributions and claim tax deductions for them.
If the home deposit saver already has some savings they can contribute that to super now, complete their tax return early, and get a healthy refund soon. The refund could go into their first home deposit savings plan next financial year.
The earnings that can be withdrawn for a house deposit will be a deemed rate rather than the super fund’s actual earning rate. It will be the bank bill rate plus three per cent, set by the Reserve Bank. It is currently about 5 per cent.
An example contribution of $1,000 of pre-tax income shows the Scheme’s benefit. Saving outside super gives $655 after tax which earns $103.24 over three years. Income tax on that is $35.62, leaving $67.62 net. The total saved for the deposit is $722.62.
Saving in the new Scheme inside super sees $850 of the $1,000 pre-tax income saved. At 5 per cent this earns $133.98 over three years. There is no specific tax on the earnings but the whole amount withdrawn will be taxed at the saver’s marginal rate less 30 per cent.
The person on 34.5 per cent tax would pay 4.5 per cent tax or $44.28. This means they would save $939.70 instead of $722.62 when saving outside super. Maybe Mum and Dad can help?