Legal way to save up to $15,000 in tax when buying a new home

Getting on to the property ladder is tough. But there’s a trick to save up to $15,000 and it could be a game-changer for first-time buyers.

ANALYSIS

The huge growth in property prices in recent years have led to a decline in rates of home ownership across the country, with 67 per cent of Aussies owning their own home, down from 70 per cent in 2006.

Getting on to the property ladder is tough.

At the same time, even through the current property market decline, property is still one of the biggest drivers of true wealth. Even after factoring in the current softening of property prices, in the last five years alone the value of all property in Australia has increased by over 47 per cent.

Finding a way to get onto the property ladder is valuable.

Given the challenges around getting into the market, you need to give yourself every advantage. Thankfully, the Government recognises the difficulty that surrounds getting into the property market, and have put some measures in place to help.

Using them to your advantage can help you buy your first home sooner, and take one of the biggest steps to long-term financial security and true wealth.

Enter the first home super saver scheme

The first home super saver scheme (FHSS) allows you to save part (or all) of your property deposit through your super fund. Because you can contribute to super with pre-tax money, the FHSS can help you build your property deposit faster.

There are some complexities to the rules, and there are a couple of risks that can catch you out if they aren’t well managed. In this piece, I cover the key rules and how you can use them to your advantage.

How the FHSS works

The FHSS was established in 2017 to help first homebuyers get on to the property ladder. The rules of the scheme allow you to make extra tax deductible contributions of up to $50,000 per person to your super fund, and then withdraw this money and the investment earnings generated in super and use this to purchase your first home.

For couples, the benefit can be combined to leverage up to $100,000 in super savings, giving you a solid deposit for your first home.

The first home super saver scheme helps first-time buyers get on the property ladder.

The contributions you can use for this are limited to a total of $50,000, or $15,000 in any given year. But because the timeline is based on financial years, if you’re smart about how you plan you can take advantage of these rules quickly.

For example:

June 2023 (FY23 financial year) – you contribute $15,000 to your super fund

July 2023 (FY24 financial year) – you contribute another $15,000

July 2024 (FY25 financial year) – you contribute another $15,000

Total contributions of $45,000 all made within 14 months.

This strategy can work well where you’re looking to buy your first home and already have your deposit saved. In this case you could choose to not use the FHSS and pay your deposit in the regular way. Or instead, with a bit of planning and prep, you could use the scheme and save yourself $7500 in tax in the process.

You can also choose to save your home deposit through super more slowly if it works with your strategy. For example, you could contribute $5000 each year through your 20s, then by the time you reach age 30 you’d have a total of $50,000 (plus your investment earnings) you could withdraw to buy your first home.

By contributing $5000 per year to your super fund through your 20s you will have $50,000 for a deposit by the time you are 30. Picture: iStock

When you make the contributions to your super under this scheme, if they’re done pre-tax i.e. you claim a tax deduction, they’re taxed in your super fund at a rate of 15 per cent. When you withdraw funds from your superannuation, the money is taxed at your marginal tax rate less a 30 per cent tax offset.

It gets a little complicated, but the implication is that you’re essentially saving an up to an additional 15 per cent of any amount you contribute. Based on the FHSS cap of $50,0000, this 15 per cent tax saving equates to $7500 (per person) – a decent chunk of change that can be a big help for someone just about to enter the property market.

What are the risks?

There are two main risks with this scheme. Firstly, because the assumed rate of return is positive regardless of what actually happens to your investments, if your fund investments go down you can withdraw more than the money you put in. This can deplete your super savings and put you behind the curve.

The second big risk comes for younger people in particular if your income and marginal tax rate increases over time.

How the FHSS tax works is as follows:

– When you contribute, you receive a tax deduction at your marginal tax rate and your super fund pays tax at the super contribution tax rate of 15 per cent, meaning the total benefit is your current marginal tax less 15 per cent.

– When you withdraw from the fund, the withdrawal is taxed at your current marginal tax rate with a 30 per cent tax offset.

If your marginal tax rate at the time of your contributions and withdrawals is the same, the total benefit to you will be 15 per cent. But if your marginal tax rate is higher when you withdraw the funds, the benefit is reduced. In fact it can be lost altogether and you can end up behind.

By using the scheme, you save an extra $7500 as a single person or $15,000 as a couple.

Consider this example:

– Your marginal tax rate when contributing to the scheme is 19 per cent, meaning the benefit to you of contributing is (marginal tax rate – 15 per cent) 4 per cent

– Your marginal tax rate when withdrawing under FHSS is 47 per cent, meaning the tax applied on the withdrawal is (marginal tax rate – 30 per cent) 17 per cent

– The result is that you end up paying an additional 13 per cent tax on this money, based on total contributions of $50,000 this would be $6500 in extra tax.

You can see that it’s possible to wipe out the tax benefit and leave you with a tax bill to boot. This can work to your advantage if your tax rate is on the way down, but for younger people it’s more commonly the other way around so you need to plan carefully.

On the flip side of this risk, there’s also an opportunity if your tax rate is lower in the year you withdraw under the scheme. This can work well for someone who is taking time out of the workforce or working in a reduced capacity, like when starting a family or starting a business.

I’ve unpacked an example of this in action here:

– Your marginal tax rate when contributing to the scheme is 47 per cent, meaning the benefit to you of contributing is (marginal tax rate – 15 per cent) 32 per cent

– Your marginal tax rate when withdrawing under FHSS is 19 per cent, meaning the tax applied on the withdrawal is (marginal tax rate – 30 per cent) 0 per cent

– The result is that you end up save 32 per cent tax on this money, based on total contributions of $50,000 this would be $16,000 in tax savings

There’s a strategic opportunity to save some serious tax and build your property deposit faster, if the stars align with your strategy.

The wrap

The FHSS can help you build your property deposit faster through super, saving a heap of tax in the process. But the rules are complicated and the strategy does come with risks that are important to manage.

Given you’re talking about large numbers, both in terms of the property deposit you’ll ultimately save and the property purchase you’ll then make, take the time to understand the rules and consider getting some good professional advice to make sure the strategy actually works for you – the results will be worth your investment here.

Ben Nash is a finance expert commentator, podcaster, financial adviser and founder of Pivot Wealth, the host of the How to be Successful with Money podcast, and author of the Amazon best-selling book ‘Get Unstuck’

Ben runs regular free online money education events to help you make better money choices and get ahead faster. You can check out all the details and book your place here.

Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstances before acting on it, and where appropriate, seek professional advice from a finance professional.