Using super to buy your first home

The Australian property market has been very buoyant in recent years, which has made it attractive for investment purposes, but it’s also made it hard for first time home buyers to get into the market. That’s where the First Home Super Saver (FHSS) scheme can step in – to help first home buyers save for a deposit using their super account. Find out how you can use your super to save for your first home.

If you’re a first home buyer, you can save through your super to buy your first home using the FHSS. The scheme operates in a similar way to a savings account, except you save through your super fund. If you choose to use the FHSS scheme, there are some benefits and limitations that you need to know about.

 

FHSS article: 5 key takeaways

  1. You can salary sacrifice your first home savings into super to lower your taxable income
  2. You could pay less tax on your FHSS earnings – compared to keeping it in the bank
  3. You could earn stronger returns* on your FHSS contributions, compared to your bank’s interest rates
  4. Suitable for residential property that you intend to occupy only
  5. The government proposes increasing the FHSS scheme cap to $50,000 on July 1, 2022

 

First Home Super Saver scheme – here are the basics

The FHSS scheme can be a good way to help save a deposit to buy your first home. Using your super fund, you can contribute up to $15,000 each financial year, with the total you can withdraw across all years from 1 July 2017 capped at $30,000. Eligibility is assessed on an individual basis, meaning couples can each contribute to their super, and access their own FHSS contributions to purchase the same property. For example, two people purchasing the same property together could access up to $30,000 each, bringing the amount that could be withdrawn up to $60,000.

The government has proposed to increase the capped amount for individuals to $50,000 from 1 July 2022, with retrospective application from 1 July 2018.

When you’re ready to purchase your first home, you apply to the ATO to request the release of your FHSS savings, (your contributions and associated earnings) from your super account so it’s ready to go. A good rule of thumb is to do this when you apply for your mortgage loan. You then have 12 months from the date you requested your FHSS savings to sign a contract to buy or construct a home. Don’t worry – there are fallback options if buying your first house doesn’t go to plan.

 

How the FHSS scheme works
Infographic. 1, Make voluntary supercontributions. 2, Save up to the capped amount of $15,000 per financial year. Thetotal you can withdraw across all years from 1 July 2017 is $30,000 for asingle person or $60,000 for two eligible individuals. 3, apply to the ATO fora FHSS determination. 4, withdraw funds from your super.

How to set-up and contribute to FHSS

Just to be clear, the FHSS isn’t a new or separate account to deposit funds. It’s a scheme that allows you to use your existing super account to save money to buy your first house. Your FHSS is ‘set-up’ when you meet the necessary requirements, which we’ll explain in this article.

Here’s how you can contribute to your FHSS:

Before-tax contribution – includes salary sacrifice contributions and any personal after-tax contributions you claim a tax deduction for.

After-tax contribution – includes any extra additional contributions you make from your take-home pay, that you don’t advise us you wish to claim a tax deduction.

READ MORE: HOW TO MAKE AN AFTER-TAX CONTRIBUTION

 

Ineligible contributions

You can't include contributions made by your employer or anyone else on your behalf in your FHSS determination. For example, superannuation guarantee amounts or spouse contributions.

If you include these in your FHSS determination, your request will be cancelled and you will not be eligible to apply for the FHSS in the future.

 

The benefits of FHSS

One benefit of using FHSS is the lower tax rate you may pay. For those with an income of less than $250,000 each year, you only pay 15% tax on your contributions, instead of:

Your income Your tax rate
$18,201 – $45,000 19%
$45,001 – $120,000 32.5%
$120,001 - $180,000 37%
$180,001+ 45%

If you’re in the $45k - $120k income bracket. Here is an example of the savings you could make with the FHSS:

Infographic. On $15,000, pay 15% tax on yourcontribution to your FHSS compared to 32.5% tax paid as income in the bank.Difference of $2,625 in tax payable.
§You save an extra $2,625. The higher your income tax rate, the better the benefits are for you.

As well as saving on tax, there can be other benefits to using the FHSS:

  • If you salary sacrifice to contribute to FHSS, you also lower your taxable income. So, you could pay less income tax too.
  • You also receive returns* on your contributions, (less applicable taxes). Depending on where you invest, these returns can be better than the interest rate you get with the banks.
  • If you change your mind, your savings remain in your super account and go towards your retirement savings (before and after-tax contributions limits apply).

 

The limitations of FHSS

While FHSS allows you to use your super account to save for your first home, it also has some limitations. First and foremost, you can’t dip into it and take money out like you can with a normal savings account.

Quite the opposite, with FHSS: You only get one shot to take out one sum.

The ATO then calculates earnings on your contributions, applies any tax and relevant tax offsets.

The ATO will also apply ‘ordering rules’ to calculate the maximum FHSS release amount. For more information on eligibility and how to release funds, visit: ato.gov.au/FHSS

Also – if your income (including your before-tax contributions) is more than $250,000 per year, you may have to pay an additional 15% on some or all of your before-tax contributions (bringing the total contributions tax to 30%).

 

The rules…

There are a few rules that you need to follow to be eligible for FHSS scheme:

  1. You need to be 18+ years.
  2. You haven’t previously owned a property in Australia#.
  3. You can only use FHSS once.
  4. You must intend to live in the premises you are buying as soon as possible for at least six of the first 12 months you own it.
  5. Once you withdraw your FHSS sum, you must sign your first home contract or home construction contract within 12 months. Otherwise you may have to pay 20% tax on it.
  6. With your FHSS sum, you have to purchase or construct a residential property. You can’t use it for a houseboat, motor home, vacant land or any other form of property where you can’t have a house.
  7. If you buy vacant land that you plan to build ­­on, it is the contract to construct your house that must be entered into to access your FHSS sum.
  8. You are allowed to buy any size house– as long as you follow the FHSS scheme rules above.

 

Need more time?

You have 12 months from the date you make a valid release request to the ATO to sign a contract to purchase or construct your home. Otherwise, you can:

  • Utilise the automatic 12-month extension from the ATO
  • Return the amount to your super account as an after-tax (non-concessional) contribution (this must be at least equal to your assessable FHSS released amount)
  • Keep the released funds, subject to FHSS tax of 20% of assessable released amounts

Remember that you must notify the ATO within 28 days of signing a contract to purchase or construct your home.

 

Seek financial advice

Make sure the FHSS is right for you. With all the different things you can and can’t do with the FHSS, it’s worth speaking with a financial adviser to find out if the FHSS could be right for your personal circumstances.

 

FIND YOUR ADVICE OPTIONS

 

Sources:
* All investments, including super, have some risk. The returns on the amount you invest in your super towards your FHSS can go up and down over time, known as volatility. To find out more about how super works, please read the Product Disclosure statement available at australiansuper.com/pds 
† Before adding to your super, consider your financial circumstances, contribution caps that may apply, and tax issues. Salary sacrifice may affect some Government benefits and employee benefits. Consider getting financial advice before deciding if a salary sacrifice arrangement is right for you.
‡ Superannuation Guarantee contributions made by your employer cannot be released under the FHSS scheme. Employer contributions are included in the before-tax (concessional) contributions cap, so it’s important to consider these amounts when making before-tax personal contributions.
# If you have previously owned property in Australia, you may be eligible if the ATO determines that you have suffered a financial hardship that resulted in a loss of ownership of all property interests.

This information may be general financial advice which doesn’t take into account your personal objectives, situation or needs.  Before making a decision about AustralianSuper, you should think about your financial requirements and refer to the relevant Product Disclosure Statement. AustralianSuper Pty Ltd ABN 94 006 457 987, AFSL 233788, Trustee of AustralianSuper ABN 65 714 394 898. 



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