FHSS Scheme: Greater savings on the way

By Stuart Sheary, Senior Technical Manager

The Treasury Laws Amendment (Enhancing Superannuation for Australians and Helping Australian Businesses Invest) Bill 2021 was introduced into the House of Representatives on 27 October 2021.  

If passed, from 1 July 2022, among other things, the measures will increase the maximum limit of voluntary contributions made over multiple financial years that are eligible to be released under the First Home Super Saver Scheme (FHSSS). 

Currently the maximum limit of voluntary contributions that may be released over multiple financial years is $30,000 (plus associated earnings). The proposal seeks to increase this maximum limit to $50,000 (plus associated earnings). 

This change has the potential for clients to further reduce their personal tax and save more for their first home through additional voluntary contributions to super.

In March 2021 we published an article called First Home Super Saver Scheme: How do I quantify the benefit?, which reviewed eligibility for the FHSS Scheme and quantified the benefits. In this article we quantify how much more tax your client can save from 1 July 2022 if the proposal is legislated.

Which of your clients can benefit most?

The after-tax benefit of using the new scheme will depend on the type of voluntary contributions and your client’s marginal tax rate. 

There is little tax benefit for high income earners in making non-concessional contributions to save for a first home under the FHSSS. Generally, the personal tax savings for concessional contributions make this a more effective method for saving under the scheme (despite being partly offset by super ‘contributions tax’ of 15%). 

The benefits of the scheme are not directly proportional to a client’s income. Personal tax savings for concessional contributions favour clients on a higher marginal tax rate. However, the assessable FHSSS lump sum withdrawal will be taxed at the client’s marginal tax rate with a 30% tax offset. This can complicate the assessment of overall tax savings, although from our analysis we believe that middle to high income earners seem to benefit most under the scheme. 

How much more tax will your clients save?

With the proposed increase in the maximum limit on the amount of voluntary contributions that may be withdrawn from $30,000 to $50,000, your clients can save more in tax. For example, a single client can now save up to $8,384 in tax under the new proposal compared to $4,981 under current limits. See the appendix for workings and assumptions.

*includes Medicare Levy

Certainty on saving returns

In addition to providing personal tax savings for concessional contributions and 30% tax offset on the assessable withdrawal, the scheme also provides some protection against market movements. The notional rate of return equal to the Australian Taxation Office’s (ATO) shortfall interest charge (SIC) rate on voluntary contributions provides some certainty on how much will be available for withdrawal. Currently the ATO’s SIC is 3.01%. At the time of writing this compares favourably to term deposits. Note: if actual returns within the super fund are below 3.01% then the associated earnings withdrawn under the FHSS Scheme could erode member benefits.

Failure to buy a home

If no home is purchased within the allowable timeframe (up to 24 months including any extension) an additional 20% tax will apply on the assessable FHSSS released amount unless an amount equal to the assessable FHSSS released amount (less tax withheld) is recontributed to super as a non-concessional contribution.

Conclusion

The proposed increase to the maximum limit on the amount of voluntary contributions that may be withdrawn from $30,000 to $50,000 will help your clients save more under the FHSSS and can reduce their personal tax liability. 

More details can be found on the ATO’s First Home Super Saver Scheme webpage (including information relating to eligibility). 

Appendix 1 – Proposed (maximum FHSSS withdrawal $50,000)

The above table assumes FY 2021/2022 marginal tax rates and applicable tax offsets such as LITO and LMITO. 
Note interest rates on cash is minimal meaning any subsequent additional tax on savings outside of super is also minimal. These calculations have not incorporated the additional tax on interest that would otherwise be borne by someone saving outside of super. If they had been incorporated the tax savings by using the FHSSS Scheme would look slightly more favourable. At the time of writing interest on term deposits was between 0.07% & 0.3% per annum.

Appendix 2 – Current (maximum FHSSS withdrawal $30,000)

More information

If you have any questions, or would like more information, please contact the IOOF TechConnect team on 1300 650 414.

Disclaimer
The information in this section of the website is intended for financial advisers only and is not to be distributed to clients. It has been prepared on behalf of Australian Executor Trustees Limited ABN 84 007 869 794 AFSL 240023, IOOF Investment Management Limited ABN 53 006 695 021 AFSL 230524, IOOF Investment Services Ltd ABN 80 007 350 405, AFSL 230703 and IOOF Ltd ABN 21 087 649 625 AFSL 230522 based on information that is believed to be accurate and reliable at the time of publication.