First home buyer saving scheme has merit

Despite industry criticism, many Australians stand to benefit from the plans to use superannuation as a savings scheme for first home buyers.

The draft legislation grants them access to up to $30,000 of new voluntary super contributions plus accumulated earnings. The proposed changes cover all new voluntary contributions made after July 1, 2017, subject to a $15,000 annual contribution limit.

That means obtaining the maximum $30,000 withdrawal benefit would require further contributions next tax year. The maximum amount available to be withdrawn after July 1, 2018 would be reduced by the 15 per cent contributions tax payable on concessional super contributions.

The full $30,000 limit would be available if the super contributions were made out of after-tax money. Where there are existing savings or a gift or an inheritance, putting after-tax money into super to build up part of a deposit could be popular because the after-tax investment returns in a super fund are likely to be higher than in a savings account.

The Tax Office will assess the eligibility to withdraw money and then provide instructions to the super fund to release the appropriate amount paying the Tax Office the required tax in the process.

The legislation gives the first home buyer 12 months from the release of funds to buy a home. If the purchase does not happen within that time frame, the person can apply for an extension, recontribute the released amount into super or keep the money after paying a tax equal to 20 per cent of the amount released.

For couples, provided both qualify as first home buyers, the maximum available amount is $60,000 plus earnings accumulated in the fund using a generous notional earnings rate. Initially, that rate will be set at 4.78 per cent a year with the Tax Office determining the maximum amount that can be withdrawn.

The taxation treatment of the amount withdrawn depends on the composition of the voluntary contributions but the tax payable will be relatively small, except for taxpayers at the top marginal rate. These provisions, especially allowing access to the new arrangements to a first home buyer partner whose spouse has previously owned a house, are a major improvement on the current savings options for accumulating a home deposit.

Superannuation industry criticism of the legislation that it runs counter to the sole purpose test and the strict preservation options ignore the successful integration of superannuation and achieving home ownership in other countries. More importantly, the legislation provides an incentive for younger Australians to make voluntary super contributions.

Achieving home ownership is a much more significant objective for many people than building up a retirement income in an account that can't be accessed till at least age 60. This initiative encourages younger Australians to take an interest in their super and may encourage further voluntary contributions after home ownership is achieved.

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Daryl Dixon

Executive Chairman

Daryl Dixon is one of Australia’s foremost investment experts and a well known writer and consultant. He has provided trusted advice to thousands of personal clients over more than 25 years and is an acknowledged expert in the areas of tax, superannuation (including public sector superannuation), social security and investments.

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