The Prime Minister announced the HomeBuilder program as supporting “140,000 direct jobs and one million related jobs in the residential construction sector” when the program was unveiled in early June. Scepticism dominated the media’s initial response to the program, with many declaring it to be either out of reach of ordinary Australians or not enough to make a difference.

Despite this negative response, the HomeBuilder grant can be used in conjunction with a number of other incentive programs. The result can be over 10 per cent of the cost of building a new home being paid on behalf of many Australians.

In light of this, it is worth examining whether criticism of the HomeBuilder program is warranted, and to seek out the sections of the population best placed to maximise the scheme.

The HomeBuilder program

The HomeBuilder program is available to those who enter a building contract between June 4 and December 31, 2020. All individual grants through the program are $25,000.

To access HomeBuilder, owner-occupiers must meet the following eligibility criteria. They must:

• Be a natural person (not a company or trust);
• Be aged 18 years or older;
• Be an Australian citizen;
• Meet one of the following two taxable income caps:
  • $125,000 per annum for an individual applicant based on their tax returns in either 2018/19 or 2019/20; or
  • $200,000 per annum for a couple based on both tax returns in either 2018/19 or 2019/20;
• Enter into a building contract between 4 June 2020 and 31 December 2020 to either:
  • build a new home as a principal place of residence, where the property value does not exceed $750,000; or
  • substantially renovate the existing home as a principal place of residence, where the renovation contract is between $150,000 and $750,000, and where the value of the existing property does not exceed $1.5 million; and
• Ensure construction commences within three months of the contract date.

Applicants must also commence occupation of their property immediately after the completion of the building works and continue to treat it as their principal place of residence for at least six months. Permanent members of the Australian Defence Force may be exempt from this residency requirement.

In light of the lockdown conditions re-implemented in Victoria, the time period in which construction must commence has been extended. Construction now needs to commence within six months of the contract date, rather than three.

HomeBuilder grant applications and administration is being managed by the various state and territory revenue offices.

HomeBuilder criticisms

Most doubts around the program’s efficacy centre on two issues; the narrow qualification criteria, and the small size of the grant when compared to the required spend.

The reality is that the scheme is unlikely to be heavily utilised in the more central, or wealthier, areas of Australia’s major cities. Those with more than $150,000 to put into a renovation are less likely to meet the income requirement or property value cap, or be swayed by a $25,000 incentive.

That said, for those in more central areas of Australia’s capital cities who fit under the income cap, it may be worth getting an updated valuation of their property. Property prices are, by-and-large, falling across Australia, and those who had properties just above the $1.5 million limit may find their property’s value has dipped back below the limit.

Substantial renovations

Any way you look at it, a renovation that costs north of $150,000 is substantial. That said, there are certain types of renovations that are specifically excluded from the HomeBuilder scheme.

The rules governing the scheme require eligible renovations to improve the “accessibility, safety or liveability of the property”. This appears a broad remit, however, improvements not directly connected to the main building, generally, do not qualify for a HomeBuilder grant. This rules out improvements to, and construction of, items such as detached granny flats, pools, tennis courts, spas, sheds or garages. It also excludes cosmetic improvements, such as carpeting, painting and landscaping.

Owner-builders

Owner-builders are also excluded from the HomeBuilder grants scheme. The scheme requires that the owner and the building contractor negotiate with each other on an arm’s length basis – and this is not possible if the two parties are the same person.

HomeBuilder opportunities

That said, for those looking to build homes in the expansion areas of Australia’s cities, or in regional areas, the HomeBuilder grant may be enough to help them get started.

The cost

In expansion areas around the north and south-west of Sydney, land packages are available for less than $400,000. The same is true in areas around most of Australia’s capital cities. Regional hubs, such as Wodonga or Gladstone, have blocks available for less than $200,000.

The cost of building varies significantly depending on location, and costs have a tendency to blow out, but with a modest three bedroom, two-storey build, the base price can be as little as $200,000. Additional costs, such as site costs, floors, concreting and the like, often add up to an additional $100,000.

The incentives

When the HomeBuilder grant is combined with other federal and state-based incentives, there are serious discounts to be had. The benefit is magnified for those building their first home.

Programs that may be available in conjunction with a HomeBuilder grant include:

• State-based first home owners’ grants;
• State-based first home owners’ stamp duty concessions;
• State based building bonuses;
• The First Home Super Saver scheme; and
• The First Home Loan Deposit Scheme.

State-based grants and dispensations

All Australian states and territories offer grants to those building their first home. The size of, and conditions on, the grants vary between jurisdictions. The most generous are in regional Victoria and Tasmania where $20,000 is available. Value caps usually apply (although not in the Northern Territory or Tasmania) and those in South Australia are subject to a cap lower than the HomeBuilder cap ($575,000). Queensland has launched an additional $5,000 building boost for those building an eligible new home in regional Queensland.

Complementing first home owner grants are stamp duty discounts for first home buyers purchasing land on which they build their home. Such discounts are significant, and can equate to as much as $20,000. Most states and territories apply land value limits to the discounts, however, the ACT uses household income to determine eligibility. South Australia has no specific first home builder stamp duty discount.

States are starting to roll out specific building grants to kick-start their economies. Western Australia has announced a $20,000 building bonus and those building a new home on vacant land are eligible.

Federal programs and incentives

Two federal first home buyer schemes may be used in conjunction with a HomeBuilder grant – the First Home Super Saver (FHSS) scheme and the First Home Loan Deposit Scheme (FHLDS).

FHSS scheme

The FHSS scheme requires forward planning to gain a tax advantage, however, the opportunity exists to make it work in a short time period. If executed around the end of financial year, the impact on the client’s cash flow can also be reduced.

Example 1

Beryl is on the 34.5 per cent marginal tax rate and makes the FHSS maximum $15,000 personal deductible contribution to super prior to the end of the financial year using savings held to build her first home. In doing so, she loses $2,250 in contributions tax but her annual personal tax bill is reduced by $5,175.

Ignoring earnings, Beryl then withdraws the remaining $12,750 from super in the new financial year to build her first home under the FHSS rules. She would pay net tax on the withdrawal (when the 30 per cent offset is applied) of $573.75.

By using the FHSS scheme, Beryl has saved $2,351.25 in tax. If Beryl has a partner earning a similar amount, they could execute the same strategy and double the tax saving.

FHLDS

The FHLDS does not provide a direct dollar-for-dollar benefit but can help first home builders who need assistance pulling together a deposit to secure a loan. The scheme provides a deposit guarantee of up to 15 per cent of the property’s value, ensuring the borrowers have a 20 per cent deposit.

The 20 per cent deposit means the borrowers do not have to take out mortgage insurance. Depending on the situation, this may save the borrowers hundreds, or even thousands, of dollars a year in mortgage insurance premiums.

Pulling it all together

So, how much benefit can a first home builder gain by pooling all these programs?

Example 2

Steve and Cheryl are married school-teachers living in Bendigo. They have been renting for the past six years and are ready to build their first home in their town. They have saved $60,000 as a deposit.

The couple are eyeing up a block of land that is on the market for $150,000. They are budgeting for a base building cost of $200,000 with $100,000 for site and finishing costs. So, their total budget is $450,000.

Cheryl and Steve’s incomes ensure they qualify for the HomeBuilder grant of $25,000. As they are building in regional Victoria and it is the first home for both of them, they are also eligible for the First Home Owners Grant of $20,000. The stamp duty exemption for first home owners saves almost $4,000 more.

Cheryl and Steve are both in the 34.5 per cent tax bracket and both maximise one year’s worth of FHSS scheme. Between them, this nets an additional tax saving of almost $5,000. Unfortunately, Cheryl and Steve do not qualify for the FHLDS, as the value of the finished property will exceed the price cap for their area.

Between these programs, Cheryl and Steve will have $50,000 of their $450,000 budget paid for them – about 11 per cent of the total project cost. Furthermore, they pay no stamp duty on the purchase of their land.

Immediate results

According to the Housing Industry Association (HIA), new building sales in Western Australia skyrocketed in June in response to the federal and state incentives. After record lows in May, new home sales lifted by over 200 per cent in June – showing that the multiple incentives were proving appealing to first home builders.

The upshot

Ultimately, not all stimulus programs are aimed at the greater population. There is, however, a significant number of Australians who can use the grant program to get onto the property ladder on their own terms.

For those providing advice in expansion and regional areas, a HomeBuilder grant, combined with other government incentives, may be enough of a boost to get clients’ home-building plans off the ground. For such clients, being able to move sooner rather than later may help them negate uncertainties in the property market, interest rates and lending availability.

Rob Lavery is Technical Manager at KnowIt Group.

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QUESTIONS

To answer the following questions, go to the Learn tab at moneyandlife.com.au/professionals

1. Australian citizen, Aaron, enters a contract to build a new home in Queensland on August 1, 2020. Aaron is single with taxable income of $100,000 in 2018/19 and $95,000 in 2019/20. The building contract totals $400,000 and the estimated value of the home and land upon completion is $900,000. Aaron plans to live in the property as his residence for the foreseeable future upon completion. Construction is scheduled to begin on October 1, 2020. Is Aaron eligible for the HomeBuilder grant?

1. Yes
2. No, the cost of Aaron’s building contract is too high.
3. No, the combined land and building value of Aaron’s home is above the threshold.
4. No, construction is scheduled to commence too long after the signing of the contract.

2. Australian citizens and married couple, Betty and Bill, enter a contract to undertake renovations on their suburban Sydney home on September 1, 2020. Betty and Bill’s combined taxable incomes (as per their returns) is $215,000 in 2018/19 and $195,000 in 2019/20. Their home is valued at $1.2 million and the renovations will cost $200,000 and will consist of significant upgrades to bathrooms, kitchens and movement of internal walls. Betty and Bill plan to live in the property as their residence for the foreseeable future upon completion. Construction is scheduled to begin on November 15, 2020. Are Betty and Bill eligible for the HomeBuilder grant?

1. Yes.
2. No, Betty and Bill’s chosen renovations are largely detached from the house and cosmetic in nature.
3. No, Betty and Bill’s combined taxable income is in excess of the threshold.
4. No, construction is scheduled to commence too long after the signing of the contract

3. Australian citizen, Chloe, enters a contract to undertake renovations on her regional South Australian home on September 1, 2020. Chloe’s taxable income (as per her returns) is $75,000 in 2018/19 and $70,000 in 2019/20. Her home is valued at $450,000 and the renovations will cost $150,000 and will consist of building a detached garage and driveway, landscaping and a new back balcony. Chloe plans to live in the property as her residence for the foreseeable future upon completion. Construction is scheduled to begin on November 1, 2020. Is Chloe eligible for the HomeBuilder grant?

1. Yes.
2. No, Chloe’s chosen renovations are largely detached from the house and cosmetic in nature.
3. No, the value of Chloe’s home is above the cap.
4. No, construction is scheduled to commence too long after the signing of the contract.

4. Australian citizens and married couple, Doreen and Darryl, enter a contract to build a new home on the edge of suburban Melbourne on August 10, 2020. Doreen and Darryl’s combined taxable incomes (as per their returns) is $150,000 in 2018/19 and $155,000 in 2019/20. The building contract totals $300,000 and the estimated value of the home and land upon completion is $700,000. Doreen and Darryl plan to live in the property as their residence for the foreseeable future upon completion. Construction is scheduled to begin on December 15, 2020. Are Doreen and Darryl eligible for the HomeBuilder grant?

1. Yes.
2. No, the combined value of Doreen and Darryl’s building and land is above the cap.
3. No, Doreen and Darryl’s combined taxable income is in excess of the threshold.
4. No, construction is scheduled to commence too long after the signing of the contract.

5. Which of the following statements is false?

1. All states and territories offer programs to assist people building their first home.
2. The First Home Loan Deposit Scheme provides dollar-for-dollar assistance to those saving for their first home.
3. Many states and territories offer stamp duty discounts to those building their first home.
4. Both members of an eligible couple could employ the First Home Super Saver scheme to maximise its effect.