Super saver scheme to help young Aussies on middle incomes
How popular will the budget initiative be that allows first home buyers to build up accessible savings in their super? There are several key reasons why it may attract considerable attention from younger working Australians facing marginal personal tax rates of 34.5 per cent or more.
To date, following the 1999 changes to super rules, all new super contributions and earnings are tied up untouchable until at least age 60. Being aware of this, younger Australians are wisely wary of making voluntary super contributions even when these contributions are tax deductible.
Now, from July 1, 2017, the proposed changes will permit access to up to $30,000 plus earnings of new voluntary super contributions for purchase of a first home. For a couple, this combined limit is $60,000 of contributions.
Compared with paying full rates of personal income tax to accumulate savings, the new arrangements are generous because of the access granted to the concessional superannuation tax rates. Paying the 15 per cent contribution tax rate rather than much higher personal tax rates will allow savings to build up more quickly.
Similarly, even if the contributions are funded out of after-tax income and not taxed in the fund, the super fund earnings tax rate (again 15 per cent) is far lower than the tax on personal investment income. The good news also is that if for some reason the savers opt to delay their house purchase, their savings will be earning attractive returns until they decide to make a purchase.
In the extreme case where a house isn't purchased, the magic of compound interest in the super fund will ensure that there's a substantial amount at retirement. In personal names in such situations, unused deposit savings can easily end up being diverted to consumption or earning low returns.
The terms on which the savings plus interest can be accessed are also generous. The money withdrawn from the fund will, apart from the tax-free withdrawal of any non-concessional contribution, be subject to normal income tax less a 30 per cent rebate. For most taxpayers, this will mean an effective tax rate between 5 per cent and 10 per cent.
Also, by limiting access to new savings by first-home buyers, there will be minimal impact on house prices because of a sudden spurt in demand caused by the new rules. Hopefully, if the measure is popular, there's room for raising the $30,000 limit to a higher figure to make this the preferred option for younger Australians to build up a house deposit.
Despite requiring operating systems changes, the superannuation industry is likely to welcome the new inflow of funds and be relieved that the government has not provided home buyers access to compulsory superannuation savings.