Many families will have systems in place when their kids buy their first home. Just like they help with all taxation, investment and superannuation concessions. Because the purchase of the first home is a large investment decision and the success of the child’s home ownership will impact on how the legacy is transferred.
And with the complex, large and diverse range of tax concessions for first home buyers independent advisors are crucial. Getting advice, not a sales pitch, is critical in an emotional time.
First home super savers
The first home super saver scheme came into place on 1 July 2017. It is essentially a system that creates tax concessions to people who want to buy their first home.
John is 26 and wants to save for his first home. He earns $46,000 a year. So if John earns $10,000 from his employer and saves this money for his home deposit he will pay $3,450 in tax.
If John makes a voluntary salary sacrifice of $10,000 to his superannuation fund he will only pay $1,500 in tax.
When John withdraws money from his superannuation fund the fund will release to him the $8,500 less a withholding tax of $340.
So instead of John holding $6,550 from his $10k salary he now has $8,210.
Their limitations to this scheme in that:
You can only inject $30,000 to the first home super saver scheme and enjoy the tax concessions ($60,000 per couple).
The maximum you can benefit from is $15,000 a year.
The concessions can be used in smart ways.
John lives with Sally. The have both saved $20,000 each to use as a deposit and they both have the same income so they have the same tax rate.
If John and Sally sacrifice all of their wages tax effectively to the first home super saver scheme, consume the deposit and then withdraw the funds the $40,000 will increase to $50,137.
The above is simply using the tax system to its full advantage.
The Australian Taxation Office can take upto 25 business days (so 6 weeks ish) to process your tax request to access the deposit. So if you buy a home and then home to access the cash you might be a bit stressed.
You also have to talk to your superannuation fund to see if they have the capacity to receive the pay out the First Home Super Saver deposit once they receive the ATO notification.
Your employer must be able to give you the flexibility to let you salary sacrifice your superannuation and also identify to the super fund that you have tax effectively made contributions to your first home super saver account.
After you access your monies from the superannuation fund you then have 12 months to sign a contract to buy a home (or 12 months to sign a building contract for construction).
What if you do not buy a home?
If you are unable to buy a home in 12 months (say a relationship breakdown) you can apply to the Tax Office for a 12 month extension.
Alternatively you can “put back” the released money into your superannuation fund under the first home super saver scheme. The money put back must go back into the as a non concessional (after tax) contribution. The superannuation fund must also have the relevant tax notifications as to the manner of the contribution.
You can retain the money and simply incur a flat tax of 20% of the superannuation monies contributed.
Who can use the concession?
The provisions are relatively clear
- You must be a first home buyer. If you have owned a home in Australia before you do not qualify however overseas homes are find.
- You must be over 18.
- You must not have used the scheme before.
If you have never owned a home before but your partner has: you are eligible for your share of the first home super saver scheme but your partner is not.
You must live in the home for 6 months of the first 12 months you own the home and ou must live in the home as soon as it is practical to do so.
Typically the first home a person buys is not their final home. So tax strategies to maximise the future tax deductibility of loans once the use changes is a critical tax strategy (refer to https://www.westcourt.com.au/2017/10/04/dumb-pay-debt/) Also the first home buyers grant is critical together with the generous stamp duty considerations. Likewise if a child has the likelihood of entering into a business future asset protection strategies must be considered together with residence issues.