In Budget 2017 Scott Morrison tackled the vexed issue of housing affordability by stating that there is no silver bullet – i.e., having promised to make this a centrepiece of his budget, the problem was beyond the capacity of this government to come up with a sustainable solution. But he did offer what he described as a ‘targeted and comprehensive’ plan, with two key initiatives that will be of interest to retirees:
- Assisting first home buyers use super as a vehicle to save faster for a deposit, and
- Providing incentives for older Australians to downsize from the family home.
As you will see, both policies have serious shortcomings. as you will see. Let’s start with the assistance to first home buyers first.
First home buyers fast track to a deposit
From 1 July 2017, first homebuyers will be allowed to contribute up to $15,000 each (up to a total of $30,000) to their superannuation account and later withdraw this amount as a deposit for a first home. Tax on these savings will be treated in the same way as super, with contributions and earnings taxed at 15 per cent (as opposed to the applicable marginal tax rate) and withdrawals taxed at marginal rates, let 30 per cent. Both partners in a couple can use this strategy and combine the savings for a joint home deposit.
The questions asked of the Treasurer in the press conference zeroed in on the possible flaw in this policy – will this amount of money, tax advantaged as it is, really make the difference between buying or not in overheated property markets where inner city homes come at a price of $700,000 or more. One might also ask whether young couples such as Louise and Craig, in the following example, would have $20,000 per annum pre-tax income to put into their super to save for a house, for three or more years in a row. Another concern is that this is a mis-use of superannuation as it was originally legislated in 1992 and will lead to further tinkering with the sanctity of what is meant to be a vehicle solely designed for retirement income supplementation.
How does this work?
Boosting Louise and Craig’s first home deposit
Louise 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 $8500 after the contributions tax has been paid by her fund. After three years, she is able to withdraw $27,380 of contributions and the deemed earnings on those contributions. After withdrawal tax, she has $25,760 that she can use for her deposit. By using this scheme, Louise has saved around $6240 more for a deposit than if she had saved in a standard deposit account.
Louise’s partner, Craig, earns the same income and makes the same salary sacrifice $10,000 annually to superannuation over the same period.
Together, after 3 years, Louise and Craig have $51,520 for their first home, $12,480 more than if they had saved in a standard deposit account.
Case study source Commonwealth of Australia, 2017.