Deposits get a boost

Every bit helps the first-time home buyer – even $6240

Everyone knows first home buyers are doing it tough. Soaring property prices, savings accounts that offer paltry returns and low wages growth mean their efforts to get a deposit together is a challenge. The new First Home Super Saver Scheme offers some help.

The federal government says the scheme, launched on July 1, will boost the savings for a home deposit “by at least 30% compared with saving through a standard deposit account”. At the time of writing the legislation was yet to be passed.

The scheme boost comes via tax breaks and a deemed earnings rate. The catch is you can only save up to a total of $30,000. That’s small bickies when you consider the high price of property. Still, every bit counts. As with all things super, rules and restrictions apply.

For starters, if you don’t buy a home the savings must be left in your super until you retire. Should you marry someone who already owns a house, your savings still have to stay in super instead of reducing the mortgage.

There are also limitations on how much you can save each year. While you can make before-tax contributions of up to $15,000 a year, you nevertheless cannot exceed the annual $25,000 super concessional contributions cap, which includes your employer’s 9.5%.

So where’s the benefit?

The deemed earnings rate is based on the 90-day bank bill rate plus three percentage points – double that of savings accounts. While contributions and earnings are taxed at 15%, withdrawals are taxed at your marginal rate less a 30% offset.

As the case study (see box) and graph show, someone earning $60,000 a year and contributing $30,000 over three years could save $6240 more in the home scheme than in a standard savings account. (The deemed rate is 4.78% compared with 2% for a savings account.)

The scheme is administered by the tax office, which will determine the amount of contributions that can be released and instruct super funds to make the payments.

If your super fund returns are higher than the deemed rate, the surplus remains in your account. If the fund’s returns are lower, the difference is made up from your account. The deemed rate gives savers’ earnings certainty and makes it easier for super funds to manage.

Individuals who are self-employed or whose employers don’t offer salary sacrifice can claim a tax deduction on personal contributions, meaning savings in effect come out of pre-tax income.

How much you benefit comes down to your personal circumstances. “If you’re on the top marginal rate you get a nice kicker,” says Claire Mackay from Quantum Financial. “But you’re not going to be able to put much in because if you’re on the top marginal rate your super guarantee [9.5%] is going to be pretty close to the maximum the company has to make.”

Even if the benefit is fairly marginal it might be a convenient way to save, says Mackay. “It’s a combination of knowing yourself, knowing your own strengths and weaknesses, and doing the numbers to see what’s the best outcome. For a lot of people, salary sacrificing means your employer’s payroll is looking after it for you. You don’t have think about it. It’s enforced savings.”

To work out your savings go to budget. gov.au/estimator.

Vita Palestrant was editor of the Money section of The Sydney Morning Herald and The Age. She has worked on major newspapers overseas.