Tonight Scott Morrison announced that first home buyers will be able to salary sacrifice into their superannuation to save for a home. What does that mean for you?
IMPORTANTLY – THIS SHOULD NOT BE TAKEN AS ADVICE. It does not take into account your personal situation and circumstances. Please seek personal advice (preferably through us) before making any financial decisions. All tax calculations are of a general nature. Please speak with your accountant regarding specific taxation matters.
Also, It’s 8:04pm on Budget night, so please note – as more information comes to light the below information may/will change. Also this is not legislated yet – bear that in mind.
What do we know so far:
Contributions can start from 1 July 2017
You will be able to make $15,000 of contributions in any given financial year, but this does count towards your contribution CAP.
You can only make up to $30,000 of contributions per person.
This amount can be combined with your partner for a total of $30,000.
When you draw the funds out, you draw the initial amount + any earnings the money has generated (from July 1 2018).
You CANNOT draw out your Superannuation Guarantee amounts (the employer paid 9.5% of your salary)
Contributions will be taxed at 15 per cent on the WAY IN to super, but withdrawals will be given a tax rebate of 30%.
What we don't know:
Is there a cap on how long the funds can remain in Super?
Is there a cap on the Price of the house that can be purchased?
What is the definition of a First Home Buyer?
If you partner has already bought a house, are you eligible?
Will this stack or clash with existing state based first home owner schemes?
If they remove the scheme in 5 years, do you have to pull your funds out then or can you leave them until you are ready?
How will the lenders view the deposit and borrowers capacity to save?
What is the trigger for releasing the funds - signing a contract or settlement?
Will all super funds be able to oblige?
So, let's get into it:
First of all you need to understand exactly how salary sacrifice into super works.
Let’s say you earn $70,000 including super.
Your employer will contribute $6,650, leaving you earning Gross $63,350 pa. Assuming you don’t have a FEE-HELP debt your tax payable is approximately $15,697.
This leaves you with $47,653 to pay rent, bills, buy smashed avocado and go gallivanting overseas.
Salary sacrifice means that you divert some of your $63,350 into your super fund. Money that goes into Super is only taxed at 15% instead of 32.5% (plus Medicare) – reducing the OVERALL tax you pay.
For most young people, diverting money into an account you can't withdraw from until you are 60 isn’t really that exciting, no matter how much tax you may save.
This scheme means you can divert those funds, save on the tax and then take out the money once you’re ready to buy a house.
There’s another benefit. Earnings in super are only taxed at 15% as well.
If you invested in your own name, and earned $5,000 – you’d pay 32.5% tax on that money ($1,625). In super you only pay 15% ($750).
This means over the course of your saving you can accumulate money FASTER.
Let’s look at it in a case study. Any resemblance to real people is purely coincidental.
Also if you don't like tables and numbers below, just skip them.
We have Craig and Emily
Craig earns $70,000, Emily earns $90,000 (including Super)
They are currently living on a budget of $80,000 – which is pretty tight because they rent in Sydney.
They can save $25,421 per year at this point in time. They just put their money into a bank account.
They want to buy a house worth $770,000.
The bank told them they will need $115,000 to buy it with a 10% deposit (including lenders mortgage insurance, stamp duty and legal fees.). They would prefer to buy it with a bigger deposit but they feel like prices are getting away faster than they can save!
At this rate it is going to take them 5 years to save enough for a 10% deposit – if house prices would stop increasing!
Using (what we know) about the new First home owners scheme, lets Salary Sacrifice the MAX and see if we can save faster (putting the new super money just in a low risk 1.5% return)
Now they can buy their house in about 4 years or keep saving for a larger deposit! They save $11,848 in tax combined per year, or a total of $23,696 in tax over that two year period.
Based on what we know they may pay a small amount of tax when it is withdrawn (Marginal rate less 30%) – but they will still have significantly more deposit through the tax saving (and any earnings)
This also assumes they haven’t invested the money – if invested the balance could be greater, but also more volatile.
Obviously the above example is crude, but it illustrates the power this policy could have to help first home buyers save for their deposit.
My two main concerns
Investment time frame.
Superannuation, is (generally) a long, long term investment. Because of that it tends to be invested much more aggressively than if you were investing for a short-term goal. This is because you can afford to take on greater volatility, to get a better long term return.
Saving for your house deposit is more of a short to medium term goal – so you should not invest it the same way you invest your savings. You’d hate to have a GFC the day before you wanted to buy that new 5-bedroom house in Camberwell.
An easy way around this may be to open a separate super fund invested completely differently to your Retirement fund – if your employer allows you to split your contributions (good luck) and the legislation makes it easy to note the different contributions (good luck). There has not been much guidance as to how the administration of this would work and I see it as a serious risk to the strategy.
Changes to your circumstances?
With the current Victorian first home owner’s grant, if your spouse has bought their first home, you are ineligible. I haven’t yet seen what he parameters of ‘first home buyer” are to know how this may affect you – eg.
If you meet Prince/ess charming and they already own a house; Does your money get stuck in super?
This new scheme could be quite useful for the right people but be aware of the potential pitfalls involved. It is restrictive though and if not used properly will result in tears.
There are still a lot of unanswered questions - so let's wait and see what transpires over the coming weeks.
Do I think it will help housing affordability?
I'm not one to comment on politics (It won't help) but if this is legislated you may as well make the most of it until it’s canned later.
Where to from here?
If you are saving or thinking of saving for a home, but aren’t sure where to start, we run free information nights in which we go through the process of buying your first home from start to finish. They're 100% sales bullshit free.
If you’re ready to buy/need finance, want to start looking at building towards financial freedom, or if you had more questions about this or other finance related areas – shoot me an email at email@example.com.
Until next time
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