Wednesday, 10 May 2017

Should you use the new first home buyers scheme?

First home saver scheme - Attempt number 2.

The previous first home saver scheme was separate to superannuation and due to a lack of take up, it was scrapped after a couple of years. Now we have the new and improved version 2.

I think part of the lack of interest in the old system was the minimum 4 financial year period in saving for a house, which wasn't very popular because (in voice of Veruca Salt) "I want it now".

Anyway, this new system gets away with this. Contributions can start from 1 July 2017 and withdrawals allowed from 1 July 2018. From what I can see, once we are at 1 July 2018, there is no minimum time period, but, worst case a maximum of a 1 year 'waiting period'. I don't think this is going to be an impediment to take it up.

So, should first home buyers be using it?

Well, as I usually say - if you are nearing retirement, salary sacrificing to superannuation is a no brainer. So, if you are nearing the purchase of a house, wouldn't salary sacrificing for a deposit also be a no brainer?

On the surface, Yes, absolutely. But there are a couple of small distinctive differences that we need to take into account.

The first one is that withdrawals are taxed, so this needs to be considered. Withdrawals are taxed at your marginal tax rate, less a 30% offset. Remembering that on the way into super, you are saving your marginal tax rate, less a 15% tax on entry to superannuation.

Even with the additional tax on exit, you are still better of salary sacrificing to superannuation for your house deposit (unless you earn less than $18,200).

Take for example an average person earning between $37,000 and $87,000. If they have $10,000 of pre tax dollars, then they would have only $6,550 remaining for house deposit savings after paying their income tax.

They could salary sacrifice that to superannuation, leaving $8,500 after paying the initial 15% tax. Then upon withdrawal, they would pay only 4.5% tax (34.5% marginal tax rate less the 30% offset) which would leave them with $8,117.50 - significantly more than the person who paid the income tax.

Where this would come unstuck would be if you are on a significantly higher marginal tax rate when you withdrawal as when you make the contributions. But for the example above, if that person was on the higher 39% marginal tax rate at the time of withdrawal, they'll still have $7,735 or $7,055 if they are on the top marginal tax rate. So it really only needs to be considered if you are earning below $37,000 when you make the contributions. But, if possible, planning a withdrawal in a year when you are on a lower marginal tax rate will be preferable.

It's important to also note the planned increase to the medicare levy by 0.5% from 1 July 2019 which will affect these numbers slightly and may also encourage you to withdraw and purchase a house prior to this coming into effect. But really, we're talking a few $'s and on a large purchase like a house shouldn't really sway your decision much.

Another thing to consider is how to invest the money. Most people when saving for a deposit, keep it in a high interest savings account, but most people when contributing to super investing it a mix of property, shares and bonds which provides a much better return over the long term. So what should you be doing?

Well, in terms of how much you will actually have to withdrawal for your deposit, it doesn't really matter as your withdrawal amount is going to be based on how much you contribute (less tax) then an additional deemed earning amount (based on the ATOs shortfall interest charge currently 4.78% per annum), regardless of how much your investment actually earns. If it earns more than that, the additional will stay in super, if it earns less, you will be dipping into your 'actual' superannuation balance.

But, the question is 'should you alter your investments within superannuation so this portion is aligned with the shorter investment time horizon?' Well, everyone is going to be different. Some might use this as a longer term saving strategy where they are happy to keep the money in growth assets and save for a house over 5-10 years and others may keep it in cash or bonds for a 1 - 2 year plan. The general rule is that you should invest with an appropriate amount of risk for the length of time you will be investing for, however as your withdrawal amount is based on a standard bank bill rate, a good starting point could be a diversified bond fund that will return roughly a similar amount.

It is also very important that you review your superannuation fund when doing this as well as you want to make sure that it is appropriately invested and fees are low.

So, based on these things, it appears to be a great tax saving vehicle for people to save for their first home. These contributions count towards your concessional contribution cap so you need to make sure you stay within your cap ($25,000 per annum). You can contribute up to $15,000 per annum and a total $30,000. This doesn't mean that you'll have $30,000 for a deposit, because you will be paying some tax, but you will have more than if you paid your regular income tax. And both members of a couple can do it.

But the very best thing about this new plan is that it is coming out of your income before you see it. A very disciplined savings measure that can't be dipped into a for a new car or holiday. So you can get your employer to start the salary sacrifice, then it's gone before you get your regular pay so you can go about your business spending all your money on craft beer and smashed avocados. So you really can have your smashed avo AND eat it too.

Glenn Hilber is a Certified Financial Planner with over 10 years experience and the owner of Precision Wealth Management.

This represents general information only. Before making any financial or investment decisions, we recommend you consult a financial planner to take into account your personal investment objectives, financial situation and individual needs.

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