Australians buying their first home or downsizing in retirement are about to receive a helping hand thanks to new superannuation (super) rules which come into effect on 1 July 2018.
From that date, first home buyers will be able to contribute up to $30,000 into their super fund towards a home deposit while downsizers can put up to $300,000 of the proceeds of selling the family home into super.
This new measure has been devised to assist first home buyers, many of whom have struggled to save a deposit as rising prices put even entry level properties out of reach.
At the other end of the scale, the change is envisaged to help older homeowners who frequently find themselves in large houses while trying to survive on a modest super balance or the aged pension.
Here’s how the Federal Government hopes to improve the situation at both ends of the property market:
Buying a home
Under the new First Home Super Saver (FHSS) scheme, individuals can arrange for up to $30,000 to be deducted from their pre-tax income and put in their super account. They can then withdraw 85% of that money ($25,500), plus any interest they’ve earned on it, to use for a home deposit. In the case of a couple, both partners can save $30,000, meaning a deposit of $51,000 (i.e. 85% of $60,000) plus interest can be accumulated.
So what’s the catch?
For starters, individuals can only contribute $15,000 into their FHSS account in any one year. What’s more, the compulsory 9.5% super contributions made by employers can’t be accessed; additional voluntary contributions need to be made. The annual contributions cap of $25,000 cannot be exceeded; this includes all voluntary contributions plus employer’s Super Guarantee contributions.
When the money is withdrawn, it is taxed at the individual’s marginal tax rate minus a 30% tax offset. Effectively, that means most people will pay little or no tax although higher income earners on high marginal rates will still pay some tax.
Selling a home
Under the Downsizer Super Contribution Scheme (DSC), homeowners who are 65 or older can put up to $300,000 of their home sale proceeds into their super provided it’s their place of residence and they’ve owned it for at least 10 years. In the case of a couple, both partners can deposit $300,000 (collectively $600,000) into super.
What’s the catch?
Unless you’re a wealthy retiree looking for a tax break there doesn’t appear to be one. For those who already have more than $1.3 million in superannuation, adding a $300,000 downsizer contribution will breach the $1.6 million balance transfer cap which is the maximum balance that can be held in a tax free super pension account. Given the current generation of Australians have been retiring with average super balances of well under $300,000, that is unlikely to be an issue for most downsizers.
What do you do now?
If you are looking to purchase your first home, you will need to check your super fund allows FHSS contributions and, more importantly, withdrawals. You’ll then need to arrange for your employer to deduct voluntary contributions of up to $15,000 a year. When you want to access your money, you will have to acquire a ‘FHSS determination’ (essentially a balance statement) from the Commissioner of Taxation before requesting your super fund to release the money.
Following approval of this request, your super fund deposits your FHHS money, minus any tax you’ve incurred, into your account. You then have 12 months to sign a contract to buy or build a home.
If you are looking to downsize your home, you will first need to check your super fund accepts downsizer contributions. If it does, you can deposit up to $300,000 within 90 days of receiving the proceeds of the sale. You’ll have to fill in and send your super fund a ‘downsizer contribution form’ before, or when transferring the money into your account.
If you’re hoping to either buy your first home or downsize, call us on 03 5434 7600 to discuss how the changes to super can save you money.