The question for first-home buyers today is should you be investing in the government’s new First Home Super Savers Scheme?
The question for first-home buyers today, is should you be investing in the government’s new First Home Super Savers Scheme? Will it help you achieve your home ownership dreams? How does the system work? What are the downsides?
We take a look at how the system will work, and look at the pros and cons.
Differences around the country
A person earning $100,000 a year who puts $10,000 a year into the scheme for three years, reaching the $30,000 contribution cap, would end up with $24,777 after tax to put towards their home deposit.
That will mean different things depending on where you want to buy.
In Sydney, the median house price is $1.1 million, so a 20 per cent deposit is $220,000. Even if two members of a household can pool their contributions to just under $50,000, you’re nowhere near the deposit. In fact, the money saved through the scheme would only be enough to cover stamp duty on a median-priced house in Sydney.
In Hobart, Australia’s most affordable city, the median house price is $390,000. A 20 per cent deposit is $78,000. The contributions of two people will be in the vicinity of the deposit; for single investors it will be more difficult.
The tax advantages
But money invested in the scheme is tax advantaged, and therefore is certainly one way to consider saving for a home.
First-home buyers who have their employers put money from their pre-tax income into their super account will have that money taxed at 15 per cent, instead of the standard marginal rates of 19, 32, 37, and 47 per cent (plus the increased Medicare levy), depending on your income.
As well as being tax advantaged, investing in the scheme can lower your taxable income, and therefore lower the tax you pay on your income.
Earnings generated on the money in your super account will be taxed at only 15 per cent.
When it comes time to withdraw the funds, the withdrawal will be taxed at your marginal tax rate minus 30 percentage points.
Do you have the spare cash?
Of course, not everyone will have enough cash to put into the savings account.
“Most of the people who might take this up will be able to afford a deposit anyway,” Dr Sam Tsiaplias told The New Daily.
The federal government has tried schemes like this in the past. The Rudd government introduced the First Home Saver Accounts in 2007. Under this scheme, savers were taxed at 15 per cent on the first $5,000 they deposited, and interest was taxed at 15 per cent. The government also made a 17 per cent contribution each year on the first $6,000.
But Labor’s scheme had very little uptake, and was eventually scrapped by Abbott in 2015.
What happens if you don’t use the funds saved?
It’s also important to note that once your money is invested in the super fund, it can only be withdrawn for the purpose of buying a property. If you don’t use it to buy a property, it will be locked into the fund until you reach retirement age.
Returns are fixed
One last thing to consider is the rate of return. Money put into the scheme will return 3 per cent plus the 90-day bank bill rate each year. That would currently be around 4.78 per cent. If your super fund achieves a better return, the excess will stay in your super account until your retirement. If a lower return is achieved, the extra amount will be deducted from your retirement nest egg.
Jessica Irvine writes in the Sydney Morning Herald that young Australians have finally been thrown a “tax bone” by the government.
“Sure, it’s more chicken wing than femur,” she writes. “But it’s worth considering for anyone looking to buy a home in coming years.”
Source: The Real Estate Conversation