In the budget on 9 May, the government announced a number of incentives to improve housing affordability. Let’s take a look at what’s been proposed for first-home buyers and retirees who sell their family home.
Helping hand for first home buyers
Saving for a deposit is tough for most first-home buyers. The government has proposed a new savings initiative that offers tax breaks for building a deposit through super.
From 1 July 2017, first-home buyers may be able to salary sacrifice up to $15,000 a year into super then withdraw and use these contributions as a home deposit (a lifetime limit of $30,000 applies to these contributions.)
If you’re part of a couple who’s saving for a home, both of you will be able to take advantage of this proposal, which means you could save up to $60,000 in a concessionally-taxed environment.
Keep in mind that these amounts will count towards your annual concessional contributions cap, which will be $25,000 in 2017-18.
Under the proposal, you can withdraw your contributions plus earnings from 1 July 2018 onwards. Earnings will be ‘deemed’ based on the 90-day bank bill rate plus 3%. Your contributions will be taxed at 15% on the way into super and when the money is withdrawn, they will be taxed at your marginal rate less a 30% tax offset.
"Under this plan, most first home savers will be able accelerate their savings by at least 30 per cent.” Treasurer Scott Morrison
The advantage of this proposal is the potential tax benefit you receive by saving through super. If you’re saving for a deposit outside super, you pay income tax at your marginal tax rate. For many first home buyers, this could be 32.5% (for taxable incomes between $37,001 and $87,000). Saving through super, on the other hand, means you’ll pay 15% contributions tax and—in this example—2.5% when the contributions are withdrawn.
In addition, having your earnings on these contributions inside the super system means you won’t need to include them as income in your tax return.
If you’re self-employed or your employer doesn’t offer salary sacrifice, you can claim a tax deduction for any personal contributions you make and still take advantage of this initiative.
Let’s see how it will work
Michelle earns $60,000 a year and wants to buy her first home. Using salary sacrifice, she contributes $10,000 of pre-tax income into her super account each year, increasing her balance by $8,500 a year (after contributions tax). After three years, she can withdraw $27,380 she has saved, plus deemed earnings. Her withdrawal is taxed at her marginal rate (including Medicare levy) less a 30% offset leaving her with $25,760 that she can use for her house. Michelle has saved around $6,240 more for her deposit than if she saved in a standard deposit account.
To see how saving for a deposit through super could work for you visit the First Home Super Saver Scheme – Estimator.
How we can help you
If you’re in the market to buy your first home, we can guide you through the important factors you’ll need to consider. Having a budget in place can give you the confidence to get started. Book an advice appointment or contact us and our team will be in touch.
Older Australians who downsize their home will be able to put an extra $300,000 into their super from the sale proceeds. The incentive, to start from July 2018, is designed to remove a key barrier to downsizing and free up larger homes for younger families.
To be eligible, you must be over 65 and owned your home for at least 10 years. Both members of a couple will be able to take advantage of this proposal for the same home, which means a couple could make total non-concessional contributions of up to $600,000.
If you’re already in retirement, you can still take advantage of this initiative. The existing voluntary contribution rules for people aged 65 and older will not apply to contributions made under the new downsizing cap. These rules include:
- work test for 65-74 year olds
- no contributions for those aged 75 and over
- restrictions on non-concessional contributions for people with balances above $1.6 million.
And if you’re still contributing to super, these contributions will be in addition to any other voluntary contributions that you can make under the existing contribution rules and caps. However, any change in your superannuation balance as a result of this measure will count towards the Age Pension assets test.
This initiative may appeal to older Australians who may be living in homes which are costly to maintain and no longer suit their needs.
"This measure will assist people aged 65 and over who are currently unable to contribute all or any proceeds of the sale of their home into superannuation because of the existing restrictions and caps." Treasurer Scott Morrison.
Let’s see how it will work
George and Jane, both retired and aged 76 and 69, sell their home to move into more appropriate accommodation. The sale proceeds are $1.2 million. They can both make a non-concessional contribution into superannuation of $300,000 ($600,000 in total) even though Jane no longer satisfies the standard contribution work test and George is over 75. They can make these special contributions regardless of how much they already have in their superannuation accounts.
Thinking of downsizing?
Deciding if the time is right for you to downsize can be a difficult decision. We can provide advice to help you overcome some of the financial barriers you may facing if you’d like to downsize your home.
Financial planning advice is provided by First State Super Financial Services Pty Limited ABN 37 096 452 318 AFSL No. 240019. ↩