Analysing the mechanics of govt’s super for housing scheme measure

It was confirmed that from 1 July 2017, the super system can be used by members to save towards the deposit of a first home.  The most that can be contributed (whether by concessional or non-concessional contributions, or a combination of both) is $15,000 per annum, and $30,000 in total. The most that can then be withdrawn (from 1 July 2018) is the amount contributed plus a deemed level of return.

Whilst any measure that can help people save a deposit towards the purchase of their first home should be applauded, the mechanics of how and the possible impacts should be carefully considered.

At the time of writing, we have not seen any legislative amendment released (draft or otherwise) about how this measure will work, but the Government has released a fact sheet.  Some things are known at this time based on a Government fact sheet, and these and other considerations are discussed below.

Only voluntary contributions will count towards the $15,000 per annum allowed under this measure. 

Clearly, by only allowing voluntary contributions, super guarantee (SG) contributions from employers will not count.  Whilst it is clear that there are certain contributions, such as salary sacrificed contributions that would be available, it is yet unclear how other contributions will be impacted.

For example, what if an employer pays more than the required SG in order to cover insurance premiums where the insurance is held through super?  If this is deemed to be a voluntary contribution, then a member’s SG would be eroded upon withdrawal as the money to cover insurance premiums is not in the fund.

Similarly, some employers may encourage super contributions to particular funds by paying higher contributions if employees belong to certain funds, or pay higher contributions if an employee also salary sacrifices a certain amount.  Would these also constitute voluntary contributions?

A deemed rate of earnings will apply and be available for withdrawal along with the voluntary contributions.

According to a Government fact sheet, earnings will be deemed to accrue on the voluntary contributions at a rate equivalent to the 90 day Bank Bill rate plus three percentage points (as per the Shortfall Interest Charge).  At the moment, this would be a rate of return of 4.78%.

Generally, good financial advice would often recommend that any investment which is expected to be withdrawn in the short term be placed into a capital stable investment (such as a cash or term deposit account).  This is to ensure those funds are available when needed.  If the investment chosen doesn’t provide a return at least equivalent to the deemed rate, again it’s possible the SG contributions may be eaten into upon withdrawal.

It would also be important to see if the client has any regular investments set up in their fund as the monies contributed under this proposed scheme could be automatically invested into something that is subject to market volatility.  Again, this could result in SG being used to fund a home deposit.

How much can someone actually afford to save under this arrangement?

The intent of the Government to only use voluntary contributions is admirable, as a means of protecting compulsory SG contributions.  But with a lowering of the concessional contribution cap, and a limit of $15,000 of voluntary contributions for this measure each year, there may be a question of how much it can be used.  Consider the following issues for someone who only wanted to use concessional contributions towards the measure.

• Anyone on a base salary of $105,250 or above will have at least $10,000 of compulsory SG made on their behalf, so will have a lower level of salary sacrificed contributions they can use towards this measure. Other contributions would need to be non-concessional contributions, so will have already been subject to personal tax (at a rate higher than the 15% applicable in super).
• Amounts salary sacrificed (or indeed contributed from after tax income) will have an impact on personal cash flow, so clients will need to consider how much they can actually afford to contribute. Like all super, once contributed you basically can’t change your mind until you satisfy a condition of release (which in this case would likely require you to apply the money towards the purchase of a first home).

There may be delays in the ability to access funds at the time they are needed.

In what may be viewed as an intent to relieve some of the administrative burden on superannuation funds, the Government has mentioned that the scheme will effectively be administered by the ATO, who will determine how much an individual can access from their fund.  To do this, the ATO will need to rely on information provided to it about levels and types of contributions and their timing, so it can work out the amount of eligible contributions made and the deemed earnings thereon.  For SMSF trustees this is welcome news as it doesn’t mean they need to take on extra administrative requirements.

Also, it will be a question of how quickly the funds can then be paid from the relevant superannuation fund, and how this aligns to the need for the deposit to secure a home to purchase a property. 

But there is a silver lining

Despite these potential issues, and it would be fair to say there are always issues to be ironed out whenever there are new proposals announced, there is one potential benefit.

The ability to use super to save towards a first home should come into consideration for anyone who wants to purchase their home.  When you consider that many looking to save towards their first home may be younger with potentially less involvement around their super, this could prompt them to take a greater interest in their super.  It’s an opportunity to explain how super works, ensure they are in the right fund and that they are invested appropriately for their risk profile. 

Whilst we await the release of further details around how this measure will operate, including how the Government will regulate it and whether it passes the Senate, these are the first steps for advisers to take.  After all, anything that helps to encourage engagement can only assist in helping meet future retirement needs.

This article is brought to you by BT Financial Group, and written by Bryan Ashenden, Head of Financial Literacy and Advocacy at BT Financial Group.