The first home super saver (FHSS) scheme was introduced in July 2017 to assist first home buyers save for a deposit in the tax effective superannuation environment.
Whilst there are no statistics readily available regarding the number of Australians who have made use of the scheme, it seems that the take-up has been relatively low. A possible reason for this may be that the maximum that can be released is $30,000, which with high house prices doesn’t always equate to a meaningful deposit.
In the May 2021 Federal Budget, the government announced that they would be increasing the maximum amount that could be withdrawn to $50,000. This provides up to $100,000 between a couple, and financial advisers and superannuation funds have noticed a considerable increase in enquiries about the scheme.
This article provides an overview of how the scheme works.
Eligibility
To be eligible to participate in the FHSS scheme an individual must:
- be 18 or over
- have never owned property in Australia
- not previously requested a release of super money under the FHSS scheme.
The FHSS scheme can only be used to buy a residential home in Australia. It cannot be used to buy a mobile home. If vacant land is purchased, a contract to build a home on it must be signed within 12 months although a 12-month automatic extension will be granted. The individual must also intend to live in the home, the scheme can’t be used to buy a residential investment property.
Contributions
Some people have been critical of using super for purposes other than saving for retirement. However, only additional voluntary contributions made from 1 July 2017 can be released under the scheme. This can be personal contributions that the individual has claimed a tax deduction for (concessional contributions) or contributions that have been made after tax (non-concessional contributions). Employer compulsory contributions and government co-contributions cannot be released.
The FHSS scheme can also prove valuable in engaging younger people with their super. When they make voluntary contributions, they also tend to take a greater interest in the fund’s features and benefits, including investment options, fees and insurance.
Ordering of contributions
Contributions made since 1 July 2017 are counted towards the release amount in the order in which they were made. This means that if an individual has made more contributions than their maximum release amount, either in a financial year or in total, their later contributions will remain in the fund. If concessional and non-concessional contributions are made at the same time, the non-concessional contributions are deemed to have been made first and will be released.
Withdrawal amount
Eligible contributions that can be released are limited to $15,000 in any financial year up to the current total maximum of $30,000. The Federal Budget announcement will retain the $15,000 per annum maximum cap but provide a total maximum cap of $50,000.
The FHSS scheme maximum release amount includes:
- 100% of eligible non-concessional contributions
- 85% of eligible concessional contributions
- 100% of associated earnings on eligible contributions.
Associated earnings
The associated earnings are an amount calculated by the ATO as a proxy for earnings. This makes it easy for individuals and super funds, they don’t need to calculate the actual earnings on the different types of contributions. The rate used is the 90-day Bank Bill rate plus 3% (or currently about 3.04%).
PAYG tax on withdrawal amount
The release amount is paid by the super fund to the ATO. The ATO will withhold PAYG tax on the concessional contribution and the associated earnings component of the release amount. The rate of tax is the individual’s marginal tax rate less a 30% tax offset. If the ATO can’t determine the individual’s marginal tax rate they will deduct tax at 17%.
The non-concessional component is tax free.
The individual includes the taxed component of the FHSS scheme release amount in their tax return, together with the calculated PAYG tax. Any tax adjustment will then be made as part of the return. The amount is included in the financial year that the release was requested, which could be before the amount is received.
Requesting a release amount
When an individual is ready to buy a home, they first need to request a FHSS determination from the ATO. This can be done via an individual’s MyGov account and there is no limit to the number of times a determination can be requested.
The ATO will then advise the maximum release amount.
After receiving a determination, the individual then requests a release. This can only be done once and must be done no later than 14 days after a contract to buy or build has been signed but is generally requested before a contract has been signed. The ATO will send the release authority to the super fund and the super fund will make the payment to the ATO. The ATO will deduct any PAYG tax and forward the balance to the individual.
Individuals must enter a contract within 24 months (the standard 12-month requirement plus an automatically applied 12-month extension). They must notify the ATO within 28 days of signing a contract.
What happens if there is no contract within 24 months?
Individuals who do not enter a contract within 24 months have two choices. They can recontribute the assessable component to super as a non-concessional contribution, within the 24 months and advise the ATO. Alternatively, the ATO will issue an assessment for FHSS tax of 20% of the assessable component.
Conclusion
Understanding the workings of the FHSS scheme may provide opportunities for individuals to save effectively for a home deposit. Saving via super has the added advantage for many in that they can’t be tempted to withdraw their savings at any time and spend them on something else, like they could in an ordinary savings account.
Julie Steed is Senior Technical Services Manager a Australian Executor Trustees. This article is in the nature of general information and does not consider the circumstances of any individual.