Highly anticipated legislative changes are set to ease the stress of buying your first house.
Amendments to the First Home Saver Accounts Act received royal assent last month and the long-awaited changes to the scheme will apply to houses purchased after May 25.
First home saver accounts have been around since October 2008.
First home buyers qualify for concessional tax treatment and government contributions if they make deposits into their FHSA over four financial years.
The accounts attract a 17 per cent government contribution on the first $5500 deposited in any year.
If you deposit $5500 in a financial year the government contribution is $935. Earnings are taxed at a concessional rate of 15 per cent.
A drawback with the original scheme was that if an account holder bought a house before the four-year eligibility period was up, the money in the FHSA would have to go into their superannuation account.
In last year’s budget, the government said it would make the system more flexible, allowing money saved in an FHSA over four years to go into a mortgage if a house had been purchased prior to meeting the release conditions. That change has finally become law – a year after it was announced.
To withdraw funds from a first home saver account the account holder must meet what is called a condition of release, which means buying a house or building a new house. The full amount must be withdrawn and the account closed. Withdrawing money is tax free.
Another condition of release is that you have to save at least $1000 a year over at least four financial years before you can withdraw the money. The four years do not need to be consecutive.
If you do not buy a home, you must transfer the balance of the account to your super fund. You are not allowed to open another account.
If you are more than 60 the money can be transferred directly to you.
The maximum annual contribution will be indexed over time. Account balances are capped at $80,000; that amount is also indexed.
Account holders do not have to report income earned from the account in their tax return.
A first home saver account can only be opened by an individual, so if you are saving for a home with a partner you should both open an account. You will only have to wait until one of you reaches the four-year release period to withdraw from both accounts, provided the house is bought in both names.
To be eligible to open an account you must be between 18 and 65 years old and not have owned a house in Australia. To receive the government contributions you must be an Australian resident for income tax purposes. Points to consider
The Australian Securities and Investments Commission’s consumer website, MoneySmart, says people’s savings needs change and they need to think about the future before committing to a first home saver account.
- You may decide to move overseas instead of buying a house, or you may want to put the money into a new business. If you change your plans, the money in the FHSA has to go into your super fund.
- An FHSA can only be opened by an individual. If both partners are contributing to the account – in one name – and the relationship ends, splitting money will be a problem.
- If the account you choose turns out to have an uncompetitive rate, you can transfer to another provider without losing benefits.
- ME Bank offers the top FHSA rate – 5.5 per cent, ahead of Hunter United (5.26 per cent), ANZ and the Commonwealth Bank (both 5.25 per cent).
- By comparison, online savings accounts offer as much as 6.51 per cent and 12-month term-deposit rates are as high as 6.6 per cent.
- An Intelligent Investor analyst, Gareth Brown, has calculated that an FHSA with $5000 going in each year will yield an extra $4000 over four years, thanks to the government contribution and the low savings tax rate. The interest rate on an alternative savings product would have to generate that extra $4000 to be competitive.