Revisiting the First Home Super Saver Scheme [CPD]

10 February 2022

Money & Life team

Money & Life contributors draw on their diverse range of experience to present you with insights and guidance that will help you manage your financial wellbeing, achieve your lifestyle goals and plan for your financial future.

For many years, the Government has recognised that people find it increasingly difficult to save for a first home deposit to enter the property market. This has once again been acknowledged with the House of Representatives Standing Committee on Tax and Revenue recently announcing that it will conduct an inquiry into housing affordability and supply in Australia.

Over the years, schemes such as the discontinued First Home Saver Accounts have been established to assist with this problem. Currently, there are state-based First Home Owner Grants, which are designed to provide some assistance. More recently, the Government launched the First Home Loan Deposit Scheme, New Home Guarantee and Family Home Guarantee – all designed to relieve the costly burden of lender’s mortgage insurance (therefore, boosting a person’s deposit) by providing a guarantee on certain loans made to eligible participants via approved lenders.

Since July 1, 2017, eligible first home buyers can make voluntary contributions to super that can ultimately be withdrawn (along with associated earnings), to purchase or construct their first home under the First Home Super Saver (FHSS) Scheme. The ability to withdraw under the scheme commenced on July 1, 2018.

While the scheme was introduced in 2017, there have been a few changes since it was introduced. For example, in 2019, legislation was passed relaxing the release timeframe, so that people could sign a contract and then apply for release within 14 days (as long as they have an FHSS determination at the time of signing the contract).

The Government must also see further promise in the scheme given its announcement in the 2021/22 Federal Budget to increase the maximum eligible contributions that can be released from $30,000 to $50,000. On 27 October, 2021, a Bill containing this change was introduced to Parliament.

Under the FHSS scheme, a person makes voluntary contributions to super (within limits) on a pre-or post-tax basis. Contributed amounts remain in the fund (with a maximum 15 per cent tax on earnings) until the person withdraws to purchase or construct their first home. The contributions benefit from the relevant tax concessions upon entry (e.g. made on a pre-tax basis for salary sacrifice and/or personal deductible contributions) are subject to existing contribution caps.

When the person is ready to purchase or construct their first home, contributions are released (plus a proxy amount of earnings), taxed at marginal tax rates, less a 30 per cent tax offset for concessional contributions and associated earnings (or nothing at all for after-tax contributions), and put towards the home purchase and/or construction.

The scheme provides different levels of tax effectiveness, depending on the type of contributions made and the person’s marginal tax rate.

Sounds simple, right? Well, not necessarily. Some quirks to the scheme can trip up clients (and their financial planners) if they aren’t careful.

In this article, we look at some of the main points and considerations for the FHSS scheme. If you want greater detail and the nitty-gritty of the scheme, check out ATO Guidance Note 2018/1. There’s also plenty of helpful information on the ATO website.

Overview

The general steps involved in participating in the FHSS scheme are:

  • Check eligibility: Make sure the client is eligible to participate in the scheme.
  • Contribute to super: Make eligible voluntary super contributions, noting that limits apply to what can be withdrawn.
  • Request an FHSS determination: This shows the maximum amount that can be released and is completed via ATO online. Clients should review the maximum withdrawal amount. More than one determination can be requested.
  • Request an FHSS release: An FHSS release should be requested within the relevant timeframes via ATO online. The client can only request one FHSS release, which must be done within specific timeframes of signing a contract. The client must have an FHSS determination before requesting a release.
  • Release the funds: After applying for the release of funds via ATO online, the ATO will apply to the relevant super fund(s) to release the amount(s), withhold appropriate tax, and pay the client the balance. The ATO estimates this process will currently take around 15 to 25 days.
  • Apply the released funds: The client then uses the withdrawn amount to purchase or construct their first home. However, if this doesn’t eventuate and no home is purchased or constructed, the withdrawn amount can be recontributed to super on an after-tax basis. If the released amount is not used to purchase or construct a home or recontributed to super, the client will pay penalty tax.
  • Advise the ATO: The client needs to notify the ATO how the FHSS withdrawn amount was used.

Check eligibility

To participate in the FHSS scheme, a person needs to:

  • be aged 18 years or older (voluntary contributions can be accrued under the scheme at any age, but withdrawals can only be made for people 18 years and over);
  • never have held a freehold interest, company title interest or specific long-term lease in real property in Australia (unless financial hardship rules apply – see below); and
  • never had an amount released under the FHSS scheme previously.

These requirements preclude those who have owned properties that were investments or commercial in nature, as well as those who have been homeowners previously. However, they do not prevent a person who has never owned property themselves but purchases their first home as a joint tenant or tenant-in-common with other owners who have previously held properties.

Furthermore, where parents are looking to help their children buy their first home, the FHSS scheme can also be useful. Rather than simply providing a lump sum to their child, parents can subsidise their child’s income, while the child takes advantage of salary sacrifice or personal deductible contributions for future release under the scheme.

Financial hardship

Importantly, people who have previously owned property, but lost it due to financial hardship, can still use the scheme. Financial hardship refers to the loss of all relevant property interests due to a single event. The event can result from outside forces, the client’s actions, or a combination of both.

The ATO website indicates that bankruptcy, divorce, separation from a de-facto partner, a relationship breakdown, loss of employment, illness, being affected by a natural disaster, or being eligible for early access to super, are all events that may qualify for financial hardship.

The financial hardship provisions cannot be applied to those who have already withdrawn under the FHSS scheme. Furthermore, the person also must not have acquired a new property since they lost the earlier property.

Clients can apply for the hardship provisions using their ATO online account or lodging an FHSS scheme – hardship application form.

Make eligible contributions

Only certain contributions can eventually be released under the scheme. The following contributions can be part of the FHSS scheme:

  • salary sacrifice contributions; and
  • personal contributions (both deductible and non-deductible).

Conversely, the following contributions cannot be part of the FHSS scheme:

  • mandated employer contributions (including SG contributions);
  • CGT cap contributions;
  • personal injury contributions;
  • Government contributions (such as the co-contribution);
  • third-party contributions (other than those from employers);
  • spouse contributions;
  • excess contributions; and
  • contributions to defined benefit and constitutionally protected funds.

In addition to the limits that apply to FHSS withdrawals, existing contribution caps continue to apply to the contributions made.

When making contributions that are subsequently to be released under the scheme, the client does not need to supply their super fund with any form or notification (other than the standard notice of intent if they wish to claim a deduction for all or part of the contributions). Furthermore, the client can roll over their super fund containing the FHSS contributions to another fund and still access the new fund. The release of funds under the scheme is facilitated by the ATO – more on that later.

FHSS eligible contribution limits

Total eligible contributions that can be considered for withdrawal under the scheme are currently limited to a maximum of $15,000 per financial year, up to a lifetime maximum of $30,000. Where concessional contributions are being withdrawn, the actual maximum is 85 per cent of these amounts to allow for contributions tax. If eligible, a couple can both use this scheme to purchase their first home, effectively doubling the amount available.

Only eligible contributions made on or after July 1, 2017, can be accessed under the scheme.

Withdrawals

A person will need an ATO online account (established via myGov) to be able to withdraw money from the scheme.

FHSS determination

An FHSS scheme determination is made via ATO online. Upon completing their application, clients will immediately be able to see the maximum amount they can withdraw (e.g. releaseable contributions plus associated earnings).

A person can request more than one FHSS determination. However, once a release (see below) has been requested or contract for purchase has been signed, no further determinations can be sought.

Importantly, a person must have a determination before signing a contract or applying for a release. Furthermore, if the client wishes to claim a tax deduction for any personal contributions they’ve made, a written notice of intent must be lodged with the fund(s), and a written trustee acknowledgement provided before a determination is requested.

FHSS release

Once a client has obtained an FHSS determination, they can apply for an FHSS release via their ATO online account. A person can only apply for an FHSS release once.

A client can sign a contract to purchase or construct a home either:

  • from the date they make a valid request to release their FHSS amounts; or
  • before making a valid request to release their FHSS amounts.

If the client signs their contract before making a valid request to release FHSS amounts, they will need to have an FHSS determination before they sign and make a valid release request within 14 days of entering that contract.

What can be withdrawn?

While the amount of voluntary contributions that can be withdrawn under the FHSS scheme are limited to a maximum of $15,000 per financial year up to a lifetime maximum of $30,000, only 85 per cent of concessional contributions counted towards these limits can be withdrawn, allowing for contributions tax to be charged at the rate of 15 per cent.

Considering these limits, the FHSS maximum release amount is calculated as the sum of:

  • 100 per cent of eligible non-concessional contributions;
  • 85 per cent of eligible concessional contributions; and
  • associated earnings for these contributions.

For example, if a person has made total eligible concessional contributions of $30,000 (e.g. $15,000 for two financial years), only $25,500 of actual contributions (plus associated earnings) can be withdrawn (i.e. $30,000 x 85%).

Clients who are liable for the additional Division 293 tax on concessional contributions effectively pay 30 per cent on these contributions. Even so, 85 per cent of their eligible concessional contributions can be withdrawn under the FHSS.

In the 2021/22 Federal Budget, the Government proposed increasing the maximum amount of eligible contributions that can be released under the FHSS scheme from $30,000 to $50,000. The $15,000 per financial year limit will remain. On 27 October, 2021, a Bill containing this change was introduced to Parliament. If passed, the change will apply to requests made on or after 1 July, 2022, for the ATO to make a FHSS determination.

Order of contributions for release

A client might make both voluntary concessional and non-concessional contributions under the scheme. Generally, eligible contributions made under the FHSS scheme are counted in the ATO’s determination of the maximum withdrawal amount in the order they were made (i.e. first in, first out). This means that any eligible FHSS contributions made from July 1, 2017, will be counted in the order they were made, even if they weren’t contributed with the intention that they would be withdrawn under the FHSS scheme.

In the event both concessional and non-concessional contributions are made simultaneously, the non-concessional contributions are taken to have been made first.

And finally, where a client makes personal contributions to their super fund in a financial year and claims a tax deduction for only part of the contribution, the non-concessional (or non-deductible) portion of their personal contribution is seen as having been made first for FHSS scheme purposes.

Earnings

Earnings associated with withdrawn contributions are also able to be withdrawn. However, it is not the actual earnings on these contributed amounts that can be withdrawn. Rather, the ATO will calculate an ‘associated’ earnings amount. These associated earnings are calculated as accruing daily at the Shortfall Interest Charge (SIC) rate (applicable for that day).

The SIC rate has moved between 3.01 per cent and 4.54 per cent per annum in the past two financial years.

For the 2017/18 year, earnings on any eligible contributions made during the year are calculated from the very start of the financial year. In 2018/19 and subsequent financial years, earnings on a specific contribution are calculated from the beginning of the month in which the contribution was made. The last day for which earnings are calculated is the day the ATO makes its determination.

Taxation of withdrawals

Non-concessional contributions withdrawn

The portion of withdrawal attributable to non-concessional contributions is tax-free (it will be non-assessable, non-exempt income).

Concessional contributions and earnings withdrawn

Concessional contributions that are released and earnings are referred to as the assessable FHSS released amount. This amount is taxed at the client’s marginal tax rate with a 30 per cent tax offset applied. The tax offset is non-refundable and cannot be carried forward to future years. Assessable FHSS released amounts are precluded from many income definitions for other Government benefits and payments.

The client needs to include the assessable FHSS released amount withdrawn in their tax return for the year a release is requested.

Withholding tax

When paying a client’s FHSS scheme withdrawal, the ATO will withhold tax from the payment and offset the remaining amount against any outstanding Commonwealth debts (where relevant). The remaining balance is then released to the person.

If the ATO can ascertain the client’s likely tax rate for the year, it will withhold tax in line with that estimate (less a 30 per cent tax offset). If the client’s likely tax rate is harder to ascertain, the withholding rate will be 17 per cent on the relevant portion of the withdrawal.

What must the withdrawn funds be used for?

The amount withdrawn under the FHSS scheme must be:

  • Used to purchase or construct the client’s first home in Australia. The contract must be entered into no earlier than 14 days before the release request is made and no later than 12 months after the withdrawal request is made.
  • Used to purchase or construct a home the client intends to inhabit as soon as practicable for at least six of the first 12 months the home is habitable.
  • Less than the amount used to purchase or construct the home.

The ATO has the discretion to extend the 12-month purchase period and currently seems to be automatically granting clients an additional 12 months to purchase or construct a home (i.e. 24 months in total).

If the FHSS amount withdrawn is not used to purchase or construct a home or recontributed to super (see below), a penalty tax is applied at the rate of 20 per cent of the assessable FHSS released amount.

Avoiding penalty tax by recontributing

If the client does not purchase their first home, they may recontribute the assessable FHSS released amount, less the tax withheld by the ATO on the release amount, back into super to avoid the penalty tax. This recontribution must be in the form of a non-concessional contribution(s) and must be made within the 12 months (or extended) period from the date the FHSS funds are released.

The recontribution will count as a non-concessional contribution in the year it is made, and recontributed amounts cannot be re-released under a new FHSS determination.

Advise the ATO

Clients must advise the ATO they have signed a purchase contract within 28 days of signing that contract. If funds are instead recontributed to super, clients must notify the ATO within 12 months of the FHSS release date.

Summing up

The FHSS scheme can be a tax-effective way to boost savings for a first home deposit using the existing super environment. Clients need to be aware of what they can contribute (and ultimately access) and the process and timeframes. Before using the scheme, clients should also consider:

  • that money can only be accessed for limited purposes;
  • super funds have fees payable;
  • the risk of adverse legislative change;
  • greater administrative work is required when saving; and
  • the slower process to access funds.

Should the Government legislate the increase announced in the 2021/22 Federal Budget (now in a Bill before Parliament), the scheme is likely to become even more attractive.

Amanda Harvey is Technical Research and Editorial Analyst at knowITdigital.

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QUESTIONS

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

  1. Alan makes the following superannuation contributions:
  • 2016/17 – $10,000 salary sacrifice and $5,000 Superannuation Guarantee.
  • 2017/18 – $10,000 salary sacrifice and $5,000 Superannuation Guarantee.
  • 2018/19 – $5,000 Superannuation Guarantee.
  • 2020/21 – $25,000 personal deductible contributions.

On November 1, 2021, Alan wants to withdraw the maximum amount of contributions under the FHSS scheme. Assuming all other eligibility requirements are met, what is the maximum amount of contributions that can be released (ignore associated earnings)?

  1. $25,500.
  2. $30,000.
  3. c. $50,000.
  4. d. $21,250.
  1. Denny has been making voluntary superannuation contributions since July 1, 2017, that can be accessed under the FHSS scheme. What action should Denny take to access these contributions and the associated earnings?
  1. Sign a contract to purchase his first home before applying for a FHSS determination.
  2. Apply directly to his super fund to have the eligible amount released.
  3. First apply for a FHSS determination and then apply for a FHSS release.
  4. First apply for a FHSS release and then apply for a FHSS determination.
  1. Brad and Sally are married and wish to purchase a home together. Sally currently owns an investment property in Australia. Brad has never owned property in Australia. Which of the following is correct?
  1. Both Brad and Sally can access the FHSS scheme.
  2. Brad can access the FHSS scheme, but Sally can’
  3. Sally can access the FHSS scheme, but Brad can’
  4. Because they are married, neither Brad nor Sally can access the FHSS scheme.
  1. Betsy applied for a release of her eligible contributions under the FHSS scheme. The ATO advised that her assessable FHSS released amount was $16,280. Betsy is on the 34.5 per cent marginal tax rate (including Medicare levy). What is the approximate amount of tax Betsy will pay on the released amount?
  1. $5,617.
  2. $958.
  3. $733.
  4. $252
  1. Which of the following contribution types is not eligible for release under the FHSS scheme?
  1. Salary sacrifice.
  2. Personal deductible.
  3. Superannuation Guarantee.
  4. Personal non-deductible.

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