Q: I earn $70,000 a year and I am thinking about setting up a salary sacrifice arrangement to superannuation of $10,000 a year over three years under the Government’s new First Home Super Savings Scheme. Is this an effective form of saving for my first home?
A: This would reduce your take home pay by $6450, or $538 a month. However, by reducing taxable income it would also provide an annual tax saving of $2050 (the saving is $3550 less $1500 of tax on the contribution)
Super funds will have to pay a deemed rate on FHSSS contributions, which is currently 4.78 per cent. Withdrawals will be taxed at your marginal rate (including the Medicare levy), less a 30 per cent offset.
Taking this into account, you would be $6210 better off after three years, compared with investing after-tax income in a term deposit at two per cent over three years.
By making the salary sacrifice contributions over three years you would have $25,892 to go towards the purchase of a first home, which is equivalent to a five per cent deposit on a $500,000 property.
While this is a good result, it is unlikely to meet a lender’s minimum deposit requirement, so further funds from outside the scheme would be required for the deposit.
It will be interesting to see how this scheme will operate in practice. One key question is how super funds will honour deemed earnings. Investment earnings can’t be guaranteed, so how will the deemed earnings be guaranteed in years when the fund doesn’t generate returns above the deemed rate?
Another question is how quickly super funds will be able to release the money. With a house auction, funds for the deposit are required on the same day as the offer.
Another question is how this scheme will work for couples where one partner is a first home buyer and the other is not.
Lindzi Caputo is a wealth manager at HLB Mann Judd