First Home Super Saver Scheme: How do I quantify the benefit?

By Stuart Sheary – Senior Technical Manager

The First Home Super Saver (FHSS) scheme allows first homebuyers to save for their first home through voluntary contributions to super. First homebuyers may then access these contributions together with associated earnings when they are ready to purchase a home. Eligible voluntary contributions to super include some concessional contributions (example via salary sacrifice or personal deductible contributions) and non-concessional contributions (excluding spouse contributions). The FHSS Scheme excludes contributions such as superannuation guarantee contributions and spouse contributions.

The scheme can provide several advantages including personal tax savings for concessional contributions, a 30% tax offset on the assessable withdrawal, as well as a notional rate of return on voluntary contributions providing some protection against market movements.

Within a financial year up to $15,000 of eligible voluntary contributions can be contributed towards the scheme i.e. count as an amount that may be released, subject to a limit of $30,000 across all financial years. Notional earnings on these contributions are added to the maximum amount that may be withdrawn.

What is the benefit?

The after-tax benefit of using the scheme will depend on the type of voluntary contributions and your client’s marginal tax rate.

There is little tax benefit for high income earners in making non-concessional contributions to save for a first home under the FHSS scheme. Generally, the personal tax savings for concessional contributions make this a more effective method for saving under the scheme (despite being partly offset by super ‘contributions tax’ of 15%).

The benefits of the scheme are not directly proportional to the client’s income. Personal tax savings for concessional contributions favour clients on a higher marginal tax rate. However, the assessable FHSS lump sum withdrawal will be taxed at the client’s marginal tax rate with a 30% tax offset. Middle to high income earners seem to benefit most under the scheme.

As an illustration and using the same assumptions as for the case study below but varying income it was found the savings at different levels of income are estimated as follows.

Income
(marginal tax rate)
$40,000
(21%*)
$80,000
(34.5%*)
$130,000
(39%*)
$190,000
(47%*)
Individual $2,607 $4,457 $5,167 $5,077
Couple
(same marginal tax rate)
$5,214 $8,914 $10,334 $10,154

* Includes Medicare Levy

Case study

The following case study of Simone and Kevin, a couple looking to purchase their first home, can illustrate the potential benefit of saving a deposit through the FHSS Scheme.

Simone and Kevin earn $130,000 a year (39% marginal tax rate including Medicare Levy) and $80,000 (34.5% marginal tax rate including Medicare Levy) per year respectively. They wish to save $10,000 each year over the next three years for a deposit on their first home. They each make personal deductible contribution on 1 April 2019, 1 April 2020 and 1 January 2021. The couple then get a determination to withdraw their savings on 31 March 2021.

 No FHSS SchemeWith FHSS Scheme
SimoneKevinSimoneKevin
YEAR ONE    
Salary $130,000 $80,000 $130,000 $80,000
Earnings^ $2 $2   
PDC*    $10,000 $10,000
Taxable Income$130,002$80,002$120,000$70,000
Tax$35,767$16,987$31,687$13,537
Saving $4,082$3,452
     
YEAR TWO    
Salary $130,000 $80,000 $130,000 $80,000
Earnings $7 $8   
PDC    $10,000 $10,000
Taxable Income$130,007$80,008$120,000$70,000
Tax$35,769$16,989$31,687$13,537
Saving  $4,082$3,452
     
YEAR THREE    
Salary $130,000 $80,000 $130,000 $80,000
Earnings $10 $11   
PDC    $10,000 $10,000
Withdrawal $26,652$26,652
Taxable Income$130,010$80,011$146,652$96,652
Tax$35,770$16,990$42,461$22,931
Less 30% offset   $7,996$7,996
Final Tax $35,770 $16,990 $34,265$14,935
Saving $1,505$2,055
Total personal saving $9,667$8,957
Contributions tax $4,500$4,500
Net saving over 3 years $5,167$4,457
Combined overall saving $9,624
No home purchase
Assessable withdrawal $26,652$26,652
20% penalty $5,330$5,330
Worse off $163$873
Worse off combined $1,036

^ Earnings in ‘No FHSS Scheme’ assumes net after tax cashflow invested at 0.3% per annum. For example in year one if Simone and Kevin do not participate in the FHSS Scheme and do not make a personal deductible contribution they will have an additional $5,920 and $6,550 respectively to invest at 0.3% outside of super. This is based on the PDC less the tax saving.

* Personal deductible contribution

The above table assumes FY 2020/2021 marginal tax rates and applicable tax offsets such as LITO and LMITO.

Are you eligible?

To be eligible, clients must never have owned real property in Australia. This includes vacant land, an investment property, certain long-term lease arrangements and company title interests in land in Australia. Exceptions apply to former owners of property who have suffered financial hardship. See the ATO’s First Home Super Saver Scheme page for more details.

In addition, eligible applicants need to be at least 18 years old and not previously withdrawn money under the FHSS scheme. For example, a client who has previously withdrawn under the scheme but failed to buy their first home within 24 months (a standard 12 month requirement plus an automatically applied 12 month extension) cannot make a further withdrawal under the FHSS scheme despite still being a first home buyer.

Assessed on an individual basis

Each member of a couple will be assessed individually for their eligibility to the scheme. For example, Jill and Mohammad wish to purchase a property jointly. Jill has owned a property previously, Mohammad has not. Mohammad is eligible to participate in the FHSS scheme but Jill cannot.

How do I save for the scheme?

Voluntary super contributions of up to $15,000 a financial year, capped at a total of $30,000 and earnings on these contributions may be withdrawn under the FHSS scheme. This includes voluntary contributions made from 1 July 2017 even if the individual was not intending to purchase a home at the time of contributing them. For example, if an individual made a $20,000 personal deductible contribution in one financial year then only $15,000 will be counted towards the scheme.

Tech Tip - There is no special form or account that needs to be created to make voluntary contributions eligible under the scheme, contributors can add to their existing Super account.

Associated earnings

Associated earnings on voluntary contributions form part of the release amount under the FHSS scheme. Associated earnings are compounded daily and calculated using the ATO’s Shortfall Interest Charge (SIC) for the relevant period, currently 3.02% per annum. The SIC is based on the RBA 90-day Bank Accepted Bill rate plus an uplift of 3%. The application of notional earnings rather than actual earnings reduces the impact of market risk, unless performance is so poor that the super fund balance falls below the FHSS allowable release amount. For contributions made from 1 July 2018, associated earnings accrue from the first day of the month the contribution is made to the date of the ATO determination. For contributions relating to FY2017/2018, associated earnings accrue from 1 July 2017 through to the date of the ATO determination.

How much can I take out?

Before requesting a withdrawal, your client should apply for an FHSS determination which will confirm the amount that may be withdrawn under the FHSS scheme (known as the FHSS maximum release amount). Applications are made via your client’s online myGov account. It is not compulsory to withdraw monies upon obtaining a determination. Clients can make another application to receive an updated FHSS determination.

The FHSS maximum release amount includes:

  • 100% of eligible non-concessional contributions
  • 85% of eligible concessional contributions (this reflects the 15% ‘contributions tax’ that applies to concessional contributions)
  • 100% of associated earnings on eligible contributions.

A first in, first out basis applies on withdrawals of eligible contributions. Contributions you make in earlier financial years are withdrawn before contributions in later financial years. Earlier contributions made within a financial year are withdrawn before contributions made later in the same financial year. Both subject to the $15,000 annual cap and total cap of $30,000. For example, in a financial year Ling made $8,000 of voluntary concessional contributions followed by a non-concessional contribution of $10,000 a month later. Contributions eligible for the FHSS scheme include $8,000 of the voluntary concessional contributions as these were contributed first and $2,000 of the non-concessional contributions. If Ling had contributed these amounts at the same time it will be assumed that non-concessional contributions had been made first.

Request release

Upon receiving an FHSS determination, clients apply to the ATO to have an amount up to the specified FHSS maximum release amount released from their super fund. The released amount is paid to the ATO who withhold tax and pay the remaining amount to your client.

Tech Tip - Client’s wishing to withdraw less than the maximum amount should remember that they cannot make a second request to top up the amount withdrawn.

Tax on withdrawal

On withdrawal, any released concessional contributions and any associated earnings (both on concessional and non-concessional contributions) are taxed at your client’s marginal tax rate based on previous tax returns, if the client’s marginal tax rate is unknown withholding tax of 17% will apply. A non-refundable 30% tax offset is available on the assessable amount. Any released non-concessional contributions are not taxed.

The ATO will withhold tax based on the clients expected marginal tax rate less the 30% tax offset before paying the remaining amount to your client.

Timing

Clients who have received a determination and signed a contract to buy or build a property have 14 days to submit their release request. Clients should be aware it can take between 15 and 25 business days to receive their money after submitting their request.

Tech Tip - To avoid this tight timeframe many clients may prefer to release monies before they enter a contract to buy or build a home. In this case, they must enter a contract within 24 months (a standard 12 month requirement plus an automatically applied 12 month extension) of making a valid release request.

Failure to buy a home

If no home is purchased within the allowable timeframe (up to 24 months including the extension) an additional 20% tax will apply on the assessable FHSS released amount unless an amount equal to the assessable FHSS released amount (less tax withheld) is recontributed to super as a non-concessional contribution.

This is just a brief summary of the scheme and more details can be found on the ATO’s First Home Super Saver Scheme webpage (including information relating to eligibility).

More information

If you have any questions, or would like more information, please contact the IOOF TechConnect team on 1300 650 414.

Disclaimer
The information in this section of the website is intended for financial advisers only and is not to be distributed to clients. It has been prepared on behalf of Australian Executor Trustees Limited ABN 84 007 869 794 AFSL 240023, IOOF Investment Management Limited ABN 53 006 695 021 AFSL 230524, IOOF Investment Services Ltd ABN 80 007 350 405, AFSL 230703 and IOOF Ltd ABN 21 087 649 625 AFSL 230522 based on information that is believed to be accurate and reliable at the time of publication.