Summary of Key Practical Points:
- In the near future, employers can expect employees to begin enquiring about making salary sacrifice payments into their superannuation funds for the purpose of accumulating deposits for their first homes under the First Home Super Saver Scheme (FHSS).
- The FHSS is a Federal Budget proposal only at this stage. It will require legislative enactment to enable the FHSS to operate. Draft legislation has not been issued at the time of writing. Assuming enabling legislation is enacted, employers should be mindful that it may not reflect the currently available information on FHSS.
- Employers should monitor the legislative process (and decisions on administrative processes required to give effect to the legislative change) to ensure they are able to respond as soon as any enabling legislative change occurs and are aware of any departures from the current proposals.
- Limitations will apply to amounts that can be contributed to superannuation with a view to accumulating a first home deposit and constraints will apply to withdrawal of moneys from superannuation to fund first home deposits. The material in this article draws on published general materials/indications and is not advice. It is provided as general background information to assist employers to better understand the proposal.
- It is understood that contributions to superannuation with a view to accumulating a first home deposit can be made in modes apart from salary sacrifice. Other modes in which employees will be able to make contributions are as tax-deductible contributions made personally and non-deductible contributions made personally. However, all the modes will be subject to various limitations and constraints.
- It is expected that the FHSS will involve employers having to collect information from their employees in relation to the intended purpose of a salary sacrifice contribution being made towards accumulation of an amount for use in meeting a first home deposit. This and other administrative detail is not presently known.
- Aside from any legislative constraint on providing advice, it seems prudent for employers not to offer advice on the FHSS to their employees.
- We have included some references to further information on FHSS that employees may like to review as part of any information gathering process.
Following the announcement of the Federal Budget on 9 May 2017, employers can expect employees to seek to salary sacrifice sums for payment into the employee’s superannuation fund for the purpose of accumulating an amount as a deposit on a first home.
We stress that the FHSS is a proposal only and until legislation is enacted it will not apply and its actual nature will not be known. We provide a briefing on the proposal below
The fundamental elements of the FHSS are:
- From 1 July 2017, individuals will be able to make contributions to superannuation that can be used to pay a deposit on a first home.
Note: Individuals who are employees will generally be able to make tax deductible contributions to superannuation outside the salary sacrifice regime from 1 July 2017. Previously, there was a constraint which prevented most employees doing so. As noted below, the budget proposal contemplates employees will also be able directly to make tax deductible contributions under the FHSS. However, the focus of this briefing is employees who want to salary sacrifice.
- The employee will only be able to make voluntary concessional (salary sacrifice/tax deductible) contributions up to $15,000 per year. It follows that compulsory superannuation guarantee contributions cannot count as FHSS amounts.
- The total amount of the voluntary concessional contributions towards a first home deposit will be $30,000. However, where a couple are saving for a first home, each of them will be able to make voluntary concessional contributions (of up to $30,000) to their own superannuation scheme – giving them capacity collectively to contribute up to $60,000.
- A voluntary concessional contribution made towards a first home deposit will count towards the employee’s annual concessional superannuation cap. As noted in Treasury Fact Sheet 1.4, the total annual concessional contributions (i.e. compulsory employer contributions, voluntary concessional contributions for purposes of accumulating a deposit, and voluntary concessional contributions for the purpose of increasing an individual’s superannuation balance to fund their retirement) of the employee cannot exceed $25,000 in 2017-18. Employees who exceed the permitted level will be subject to penalisation.
- Employees will also be able to make non-concessional (i.e. non-salary sacrifice/non-deductible) contributions towards FHSS in addition to concessional contributions. The Budget materials observe that employees might conclude that, in their circumstances, this is attractive – e.g. having regard to the manner in which income earned within a superannuation fund is taxed at the time it is earned by the fund, the rate of return within the fund, and the tax treatment of those earnings when they are withdrawn for use in paying a first home deposit. The initial making of a non-concessional contribution will not be taxed and withdrawal of the non-concessional contribution itself to pay a first home deposit will also not be taxed.
Note: The amounts of non-concessional contributions made to superannuation which are made to augment a contributor’s superannuation balance are capped. It is presently assumed that any non-concessional contribution that is made with a view to accumulating a first home deposit must also fall within the relevant non-concessional cap and total superannuation balance constraints. Employees making non-concessional contributions need to be mindful that there are adverse consequences where the cap is exceeded.
- The amount contributed (together with deemed associated earnings) will not be able to be withdrawn for a first home deposit until 1 July 2018.
- The ATO will administer the FHSS. It will determine the amount of contributions that can be released and direct superannuation funds to make payments accordingly.
- The ATO will also administer compliance mechanisms (to be developed in consultation with Treasury) to ensure that individuals withdrawing funds from superannuation actually use the withdrawal in paying a first home deposit.
Comment on the first point
In relation to the first point made above, a further observation needs to be made.
Treasury Fact Sheet 1.4 implies that employees whose employers do not permit salary sacrifice can make tax deductible superannuation contributions to their super fund for the purpose of assembling a first home deposit in the amounts as set out in the foregoing points. The Fact sheet states:
“Individuals who are self-employed or whose employers do not offer salary sacrifice can claim a tax deduction on personal contributions, meaning savings effectively come out of pre-tax income.” (emphasis added)
While this statement does not appear in the Budget Paper discussion (see Budget Paper No. 2 at p. 30), it is consistent with the position that from 1 July 2017 most employees will (within their concessional superannuation caps) be able to directly make tax deductible contributions to superannuation for purposes of augmenting their superannuation benefit balance.
We anticipate that employees will be attracted to salary sacrifice by the simplicity and convenience of this. Employees will also favour salary sacrifice due to deriving tax relief immediately, rather than suffering PAYG withholding and having to recoup tax via later lodgement of a personal income tax return.
Illustration of treatment of salary sacrificed amounts
As further background to understanding the operation of FHSS and the application of tax , it is worthwhile considering the following example given in Treasury Fact Sheet 1.4:
Boosting Michelle and Nick’s first home deposit
Michelle earns $60,000 a year and wants to buy her first home. Using salary sacrifice, she annually directs $10,000 of pre-tax income into her superannuation account, increasing her balance by $8,500 after the contributions tax has been paid by her fund. After three years, she is able to withdraw $27,380 of contributions and deemed earnings on those contributions. Her withdrawal is taxed at her marginal rate (including Medicare levy) less a 30 per cent offset. After paying $1,620 of withdrawal tax she has $25,760 that she can use for her deposit. Michelle has saved around $6,240 more for a deposit than if she had saved in a standard deposit account. Michelle’s partner Nick has the same income and also salary sacrifices $10,000 annually to superannuation over the same period. Together they have $51,520 that they can put towards a deposit, $12,480 more than if they had saved in a standard deposit account.
It will be noted that contributions tax (in Michelle’s circumstances, at 15%) is payable by the super fund on the concessional contributions. The super fund will pay tax on the super fund’s earnings ascribed to the concessional contribution. When the amount of the concessional contribution and earnings (both less tax paid by the super fund) are withdrawn to pay a first home deposit, Michelle has to pay tax on that amount at her then marginal rate (plus Medicare levy) but she is entitled to a 30% off-set.
The Practical Ramifications of FHSS for Employers
At this stage, the administrative processes in relation to the FHSS have not been determined. In these circumstances, the practical implications such as whether any categorisation information has to be collected from employees at the time of voluntary contribution and transmitted to the relevant superannuation fund are unclear.
We understand that if an employee makes a contribution to superannuation with a view to accumulating a deposit and does not withdraw the contribution to pay the deposit on a first home, the contribution will remain in the fund as part of the employee’s normal retirement balance. As such, it may be that identification of a specific purpose at the time of contribution will not be required and the ATO will merely apply the above limitations when asked to authorise a withdrawal as noted in the second last dot point in the above discussion of the fundamental features of FHSS.
However, we think this could lead to problems and it is likely that employers will be required to include identification of the home deposit purpose of a salary sacrifice contribution to a super fund at the time the contribution is paid to the fund.
It is important to note that the legislation providing for the FHSS has not been enacted at this stage. Employers will need to monitor the legislative position, as employees may not appreciate that enabling legislation will be required before employers can give effect to any salary sacrifice request.
Aside from any legislative constraint on providing advice, it seems prudent for employers not to offer advice on FHSS to their employees. We have included some references to further information below that employees may like to review as part of any information gathering process.
Further information is available on the ATO website. The Treasury Fact Sheet that was mentioned earlier contains a link to material which it identifies as ‘an online estimator to help people understand the advantages of saving for a home deposit through superannuation’.