BY LAURENCE SMITH, FINANCIAL ADVISER, UEM WEALTH
One of the privileges of being a financial planner is the opportunity to listen to people share their goals, fears, and aspirations. Lately, a common concern has emerged: “I’m worried whether my kids will ever be able to buy a home.” The dream of home ownership seems increasingly out of reach due to the many hurdles that first-time buyers face.
A lesser-known strategy that can help is the First Home Super Saver Scheme (FHSS). This provision allows individuals to use certain superannuation contributions to help purchase their first home.
The concept is simple: you make extra contributions to your superannuation, and then, when you’re ready to buy a home, you can access those contributions. The amount you can withdraw depends on the contributions made and the length of time they’ve been in the super system. Under the scheme, you can access up to $15,000 of eligible contributions per year, and a total of up to $50,000. While the funds are in super, they are also deemed to earn interest, which is calculated at the Australian Tax Office’s Shortfall Interest Charge (SIC) rate – the rate applied to late tax payments. There are conditions and fine print, but that’s the gist of it.
There are three key benefits to using this scheme as part of a first home deposit strategy:
- It’s easy to get started: Eligible contributions include personal contributions and salary sacrifice contributions. Starting is as simple as arranging with your employer to salary sacrifice part of your income1.
- It helps protect you from temptation: Moving money into superannuation makes it less accessible, so it’s harder to dip into your savings for impulse purchases. The funds are not readily available through your online banking app.
- It reduces tax paid personally: Interest or earnings on savings in a non-superannuation account are taxed at your marginal tax rate plus Medicare levy. For someone earning between $45,000 and $135,000, that rate is 30% plus the 2% Medicare Levy. For example, $5,000 in a savings account earning 3.5% interest will generate about $175 in interest per year, which would be taxed at approximately $56 including Medicare levy. After tax, the effective interest rate drops to about 2.38% per annum. In comparison, contributing the same $5,000 to super and claiming it as a tax deduction could reduce your annual tax bill by about $1,600[2]. Allowing for the contributions tax of $750 that will be applied to the contribution, the net tax savings are estimated to be $850.
While this strategy offers some clear advantages, saving for a home deposit is still a challenging task.
It remains an ‘elephant’ that can only be eaten one bite at a time. Time, patience, and discipline are still required to reach this goal. However, using strategies like the FHSS can make the journey a little easier by taking advantage of available opportunities.
1 Superannuation contributions are subject to an annual cap. Exceeding the cap can result in penalties. You should seek financial advice before making additional contributions to superannuation.
2 Based on assumed taxable income of $135,000 per year.
Disclaimer
General Advice Warning – this is untailored, general advice. It does not take into account your personal circumstances. You need to decide whether it meets your needs. Laurence Smith is an Authorised Representative and UEM Wealth Pty Ltd is a Corporate Authorised Representative of Lifespan Financial Planning Pty Ltd (AFSL 229892). Laurence Smith may offer services through UEM Wealth and UEM Group. Accounting services are provided by UEM Group. Financial Services (financial product advice and dealing) are provided by UEM Wealth. To the extent permitted by law, although the same adviser may offer you services under the above business, each business is solely and separately responsible for the advice they each provide.
