Can you use your super to save for a home?

The First Home Super Saver Scheme is supposed to make home ownership happen quicker for some, but it isn't right for everyone.

By Melanie Hearse

A helping hand or simply spin?

The First Home Super Saver Scheme was introduced to help some first home buyers save a deposit faster. It lets you contribute extra money to your superannuation, and then access that money as part of a down payment for your first home.

The pros? Your contributions are taxed at a much lower rate than your income is, so you get to keep more of your money.

The cons, as we've discovered from talking to people who've used the scheme, is that the process is complicated, and it's hard to get your money when you need it.

If you're saving for your first home, our guide should help you decide if the First Home Super Saver Scheme, or FHSSS, is right for you.

In this article: 

How the First Home Super Saver Scheme works

With residential property unaffordable for many Australians at the moment, the government is keen to address the issue and score some political points. Enter the First Home Super Saver Scheme (FHSSS). 

What you need to know

  • You make voluntary concessional and non-concessional contributions into your superannuation fund to save for your first home.
  • When you're ready to buy, you apply to release your contributions along with associated earnings.
  • Interest earned on money saved in a bank account is taxed at your marginal tax rate. Money put into your super account as a pre-tax contribution is subject only to the 15% contributions tax.
  • The tax amount you can save will vary depending on your situation.
  • You must request and have your funds released by the Australian Tax Office (ATO) before signing a contract to buy your first home or you may have to pay FHSSS tax. It can take up to five weeks to have your money released by the ATO.
  • Most taxpayers earning more than $37,000 will get some tax benefit from the scheme.

How the FHSSS earns you more money

If all that talk of voluntary concessional and non-concessional contributions has you confused, you're not alone. Read our case study of a couple who were so overwhelmed by the paperwork and rules they regret giving it a go.

Put simply, the FHSSS is centred on tax minimisation and increasing the earning power of your money, since the extra money you put in and any earnings are taxed at the super concessional rate of 15%, making it a pretty good savings and investment plan depending on your financial circumstances.

Most of us pay considerably more than 15% tax on our earnings, with average income earners paying 32.5%. More than halving your tax burden can really make a difference, as many multinational companies headquartered in low-tax countries seem to have discovered.

But the FHSSS is a government program, after all, which means there are hoops to jump through.

Nevertheless, Greg Everett, general manager of GuildSuper, tells us the FHSSS is a far better option than a standard term deposit or bank account for saving for a first home.

"If you were to use a standard bank account to save for your deposit, the money you'd put in would be after you've paid tax at your marginal tax rate, and the interest you earn would also be subject to tax at your marginal tax rate," Everett explains.

"If you put the money into your super account as a pre-tax contribution instead, then you would only pay 15% contributions tax, which is a lot lower than what you're probably paying in income tax."

This means those on a marginal tax rate of 45% will pay around 17% tax on the withdrawal. If your tax rate is 32.5%, you'll pay minimal tax on the withdrawal.

"When you make a request and ultimately make a withdrawal from your FHSSS it will be taxed at your marginal tax rate, less a 30% tax offset," says Kane Munro, director of Accountancy Online.

Will the scheme work for you?

Most taxpayers earning more than $37,000 will get some benefit. 

"If you earn under this amount then there's likely to be little benefit in the First Home Super Saver Scheme from a tax break perspective," Munro says. "That said, the interest is set at a slightly better rate than a standard term deposit account, and also it is enforced and automatic savings which can be a good thing for those that struggle to save."

For comparison, the ATO has currently set the interest rate for withdrawals from the FHSSS at 4.96% (it's calculated using something called the shortfall interest charge rate), while the five-year term deposit interest rate range is 3.00% to 3.5% at the moment.

Using the government's First Home Super Saver Scheme estimator, Everett provides this simple scenario:

Let's say you earn $50,000 p.a. and salary sacrifice $5000 p.a. into your super account, reducing your take-home pay by only $3200 because of the tax savings (though it's worth pointing out that any contributions must be within existing superannuation contribution caps).

This translates to an estimated $27,639 available for a deposit under the FHSSS after saving for six years, or $7795 more than if you parked your money in a standard deposit account.

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So will the FHSSS get you a home?

On its own, probably not. Munro points out that the maximum withdrawal under the scheme is $30,000 per person, plus any interest earned.

When you make your withdrawal, you'll get 100% of non-concessional – or after tax – contributions, but only 85% of concessional contributions, as the 15% tax is taken at the time of withdrawal.

This means the maximum release for concessional contributions is $25,500, plus any earnings. If you're buying as a couple, you'll be able to withdraw a total of $60,000 plus earnings.

That's good money, but most lenders require a 10% deposit at minimum, and you'll need to cough up 20% if you want to avoid paying for lender's mortgage insurance (which ensures that the bank isn't left in the lurch if you can't make your monthly mortgage payments).

National median housing prices are sitting around the $809,000 mark, meaning you'd need up to $80,000 to dive into the lower end of the market, and $160,000 to avoid lenders mortgage insurance.

At best the FHSSS can provide a bit of welcome help.

Then there's the issue of having the financial leeway to put more of your pre-tax salary into your super account. You can contribute an extra $15,000 to your FHSSS account per year – if you can get by with that much less take-home pay minus any taxes.

"If we could go back in time we wouldn't have done it"

Understanding the intricacies of the FHSSS can be difficult for the average first home buyer, and the money is slow to be released – which is a problem when you've found the right property and need to sign contracts as soon as possible.

Young professional couple Patrick and Alison decided to use the scheme, as it was promoted as an 'easy' way to boost savings. For them, the process of trying to understand exactly how it all would work was overly complex, despite doing a lot of research.

Patrick says they struggled to wrap their heads around what concessional and non-concessional contributions were, what tax offsets meant, how to claim super contributions as tax deductions, and all the other FHSSS-specific conditions.

"As young people whose experience in super and taxes amounts to ticking some super boxes on an employee contract and filling out a basic tax return, this was a huge learning curve!," says Patrick. "My wife and I are in professional industries and complex concepts aren't foreign to us – [but] I feel for the majority of first home buyers, including us, the FHSSS process is too complicated, and will never be a success."

Requesting funds not an easy process for some

While he says the process of setting it up through their employers was very simple, they are one of the first wave of Aussies now requesting a release of their funds (this has only been possible since 1 July 2018), and this part has been anything but simple.

"It can take up to 25 business days from the time you request a release to receiving it, and you are not allowed to sign a contract in that time or you will be taxed on the benefit you received in the next financial year. We are still waiting to receive ours which we requested to be released four weeks ago," says Patrick.

"We're going to be signing a contract tomorrow because the right house came along. We're privileged enough to be able to buy now as we have help from our parents. Unfortunately, because we're signing before it has been released to us, we will more than likely be taxed the FHSSS tax. We've been through all this and we likely won't even receive any benefit. If we could go back in time, we wouldn't have done it."

When to access your money

We talked to the ATO about the length of time it can take to receive money and how to make this work in line with the far faster-paced buying process.

They noted that while you can't sign a contract to buy or build before receiving your funds, if you want to avoid paying the FHSSS tax (equal to 20% of your assessable FHSSS-released amounts), you do have 12 months (with a possibility of extending a further 12 months to a total of 24 months) from receiving funds to make a purchase.

In short, don't request the release of funds before you're ready to buy. Do your homework and get a feel for the market and what you want first and consider applying for the release before you start looking with serious intent to buy.

More about the FHSSS

While the FHSSS only goes partway towards solving the problem of coming up with a first home deposit, any help is better than none. Here's some more detail on how the scheme works.

You must be a first home buyer, and you'll need to be over the age of 18 to request a release of your funds (though you can contribute from any age).

This means you've never owned property in Australia, including an investment property, vacant land, commercial property, a lease of land in Australia, or a company title interest in land in Australia.

You must intend to live in the premises you're buying as soon as practicable, and you must live in the property for at least six months of the first 12 months you own it.

You can withdraw a maximum of $15,000 of your voluntary contributions from any one financial year and up to a total of $30,000 contributions across all years, plus associated earnings. But it's not as simple as that, since whether the contribution came from your pre- or post-tax income will influence the amount available. You can withdraw 100% of your non-concessional (after-tax) contributions or 85% of concessional (pre-tax) contributions.

The first step is to call your superannuation fund. Confirm your nominated super fund will release the money, and ask about any fees, charges and insurance implications that may apply.

Your next step is to ask your employer about salary sacrificing (talk to your HR department if you're not sure).

You can let your employer know the amount of your salary to be deducted, and it's then sent straight to your super fund. This is considered a pre-tax contribution.

If your workplace doesn't offer salary sacrificing, you can still access the scheme. You can make after-tax voluntary contributions, meaning this is not subject to tax upon withdrawing it. However, it means you won't be taxed the lower 15% rate on super contributions – you'll pay your full income tax rate. If you're self-employed, then you can make contributions directly to your fund from your post-tax income.

Contact your fund and organise how to pay – it may be direct debited automatically, or you may be sent BPay details, for example.

No. You can make the following types of contributions towards the FHSSS scheme:

  • voluntary concessional contributions – including salary sacrifice amounts or contributions for which a tax deduction has been claimed. These are taxed at 15%
  • voluntary non-concessional contributions that you've made – these are made after tax or if a tax deduction hasn't been claimed.

There are limits to the amount of salary sacrifice contributions that can be made. A person can make up to $25,000 p.a in concessional contributions (pre-tax contributions) which also includes your employer's compulsory contributions.

You can also make contributions from your after-tax pay, though you won't get a tax concession upfront. You may also be eligible to receive a government co-contribution if you earn under $51,813 per annum.

There are some key details you'll need to be aware of to avoid locking your money into the scheme. First up, you can only apply for release once.

You also need to wait to sign your contract to buy or build your home until after the funds have been released – failing to do so could see you liable to pay FHSSS tax. It takes around 25 business days for you to receive your money after you've been approved.

To release funds, you need to apply for a:

  • determination – this will tell you what you have available to withdraw if you were to do so right now. You can apply for a determination as often as you like, and you'll be given your maximum FHSSS release amount.
  • release, which can be done online using your myGov account linked to the ATO. 

If you withdraw the funds and don't end up buying a qualifying home within the 12-month timeframe (you can also apply for a 12-month extension), you must re-contribute the assessable FHSSS released amounts, minus any tax that's been deducted within the 12 months period. Any non-concessional contributions released will not have to be re-contributed.

Once returned, these funds cannot be accessed again under the scheme. Should you choose to keep the money, it will be subjected to a FHSSS tax, equal to 20% of your assessable FHSSS released amounts.

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