By Paul Rickard
On the same night that the eyes of the nation were fixed on Canberra with the vote on the legislation to allow marriage by same-sex couples, the Government had another win as the Senate passed two measures to improve housing affordability. Announced back in the May Budget, the measures involve the superannuation system and were opposed by many in the “rent seeking” superannuation industry and on the floor of the parliament by the ALP. The changes will provide a small incentive for some older Australians to downsize, and assist first home buyers to save a deposit faster and help to overcome one of the barriers for getting into the housing market.
Neither measure is a silver bullet for the housing affordability problem, but they are a step in the right direction. They don’t come at a huge cost to Government revenue (foregone tax), and won’t have any long term impact on prices in the housing market. If anything, by making the super system a little more aligned with that other primary retirement objective, home ownership, they will actually be a boost to the super system in the long term.
Here’s a run-down on the two changes and who they might suit.
Persons aged 65 or over who downsize by selling the family home will be able to make a non-concessional contribution to super of up to $300,000 from the proceeds. These contributions won’t be subject to meeting any work test, will be in addition to the current non-concessional cap and won’t be subject to the $1.6m balance test for making non-concessional contributions. If a couple, then potentially $600,000 could be contributed to super.
The only qualification is that it must be from the sale of your principle residence owned for the past 10 or more years.
Downsizing is rarely driven by just financial reasons, with lifestyle, health and family reasons more often cited as the main factors. For those who are receiving the age pension, there remains a financial disincentive to downsize as the family home is exempt from the pensioner assets test and the net proceeds from the downsizing (whether invested in cash or back into the super system) is included in the assets test. And this measure won’t do anything to improve the availability of suitable properties. But, it should prove popular with self-funded retirees who can then invest their savings in a 0% or worst case 15% taxing environment, and free up homes that no longer meet their needs for younger growing families.
At the other end of the housing market, first home buyers will be able to make voluntary salary sacrifice contributions into super, and withdraw these together with associated earnings for a deposit for their first home.
The Government says that first home buyers will accelerate their savings by at least 30% using the First Home Super Saver Scheme (FHSSS). For example, an individual earning $70,000 pa who makes annual salary sacrifice contributions of $10,000 for 3 years will be able to withdraw (after all taxes - see below) $25,892 for a deposit. This is $6,210 more than the $19,681 they would have saved if investing after tax dollars ($10,000 less $3,450 tax) for 3 years in a bank account earning 2% pa. (You can access a calculator here http://budget.gov.au/estimator/ )
The Scheme allows up to $15,000 per year and $30,000 in total to be contributed. While it will count within the individual’s concessional super cap of $25,000 per annum, both members of a couple can take advantage of the measure, meaning that potentially $60,000 can be contributed.
Special taxing arrangements will apply to these super contributions. Like other salary sacrifice contributions, they will come out of a person’s pre-tax income and then be taxed at 15% when the contributions hit the super fund. Inside the fund, the contributions will earn a deemed rate of interest (currently around 4.78% pa), with the interest amount then taxed at 15% pa. On withdrawal, the whole amount will be taxed at the individual’s marginal tax rate, less a 30% tax offset. This means that the maximum tax rate on withdrawal will be 17%.
From a home saver’s point of view, participation in this Scheme should be really easy. No new super account required, just instruct your employer to salary sacrifice and pay this amount to your super fund marked as a FHSSS contribution.
Individuals who are self-employed or whose employers don’t offer salary sacrifice can still make voluntary contributions to the FHSSS, and then claim the contributions as a tax deduction (subject to the $25,000 cap on concessional contributions). This means that savings effectively come out of pre-tax income.
Non concessional contributions (from after tax monies) can also be made, subject to the overall limit of $30,000 and $15,000 in any one year. These won’t be taxed on entry or exit, but could benefit (marginally) from the higher deemed rate of interest.
To qualify, you must be over 18 and have never owned ‘real property’ in Australia before. If you have owned or own an investment property or vacant land, you will not be eligible to use the FHSSS. But you won’t be ineligible if your partner has owned a property before, and you haven’t. To access the savings, you will need to purchase a residential property (including vacant land to be built on), sign a contract to do so within 12 months, and occupy the premises for at least 6 months of the first 12 months after it is practicable to do so.
Despite comments that “$30,000 doesn’t really give you much of a deposit for the Sydney or Melbourne markets”, this measure will prove to be popular when first home-owners realise that it is a “no-brainer”.
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