When buying a home feels like a sprint against inflation, every little edge counts. So, in this Aussie FIRE episode, we are exploring a government scheme that hopes to give you an edge: the First Home Super Saver Scheme (FHSS).

Now, full disclosure – as much as Dave poked around this topic, it’s really Hayden who has the experience. So, Dave will be learning right alongside you, asking questions that might be ticking through your mind too.

Remember, though: while this episode is here to give you guidance, don’t take everything as gospel. This government scheme, like any investment, has caveats and risks. It requires a good look through your personal lens and, most likely, a chat with a professional. Because as much as we love to share what’s worked in our experience, your mileage may vary. And remember this is only accurate as of time of recording/writing.

This episode is also heavy on numbers and hypothetical scenarios. So, for easier navigation, here’s what to expect:

• Explainer of how the FHSS works in practice
• Risks and returns in your super
• Other advantages of super
• Disadvantages of super
• Who can take advantage of the FHSS?

(Also, there are other important information that we may have missed, so don’t just stop here. This article could help: “ How Can I Benefit from the First Home Super Saver Scheme (FHSS)? ”)

What is the First Home Super Saver Scheme (FHSS) and how does it work in practice?

Simply put, the FHSS allows you to save for a home inside your superannuation fund. Essentially, you can contribute extra money into your super. That’s over and above what your employer might contribute. Some of these personal contributions can then be earmarked for your first home deposit.

Before we dig into the FHSS, let’s review the basics of your super…

How contributions work

You can add money to your super fund in two main ways. The first way is by using money from your income before it’s taxed. These are called concessional contributions . The second way is by using money you’ve already paid tax on. These are known as non-concessional contributions .

From ATO.gov.au

For the 2023/2024 year, you're allowed to contribute up to $27,500 annually as concessional contributions. If your employer is already contributing, say, $11,000 (as part of the standard super guarantee), you then have the option to add $16,500 of your own money into your super. This can be done through salary sacrificing or from after-tax income, which you can then claim as a tax deduction. Keep in mind that contribution caps do change, so it’s best to look them up on the ATO website. In the 2024/2025 financial year, the cap will be $30,000.

Potential tax benefits from super contributions

When you contribute through a concessional contribution, it’s taxed at 15% going into the super . So, if you contribute $10,000, then you’d pay $1,500 in tax, and $8,500 gets invested by your super fund. However, come tax time, you may claim that $10,000 as a deduction.

Depending on your personal situation, this could potentially reduce your taxable income and save you more in taxes than the initial 15% tax paid on the contribution. Additionally, there are other benefits you could claim if your adjusted taxable income is $37,000 or below.

Here’s an example of how that works:

Olivia works as a pharmacy assistant and earns $36,000 a year.

She decides to contribute $4,800 to her super fund as a personal contribution. To claim a tax deduction for this amount, she first notifies her super fund with a notice of intent and receives an acknowledgment.

Once that's sorted, Olivia can claim a tax deduction of $4,800, which reduces her taxable income to $31,200. However, her super fund must pay a 15% tax on the contribution, which means $720 is deducted. This leaves $4,080 credited to Olivia's super account.

Additionally, because of her income level, Olivia is eligible for the low income superannuation tax offset. It’s a super co-contribution that the government adds back into her super.

If Olivia opts to claim a deduction for just $3,800 of her contribution instead:

• Her taxable income would drop to $32,200.
• Her fund would pay 15% tax on the $3,800, so $3,230 would be credited to her account.
• The remaining $1,000 not claimed as a deduction could qualify her for a super co-contribution, depending on her circumstances. If eligible, the government could add up to $500 for the co-contribution to her super.
• She’d also qualify for the low income superannuation tax offset, which would be refunded into her super fund.

(For eligibility requirements and other details about personal super contributions, check out this ATO webpage . Or, for insight into how this scheme would apply to your income, speak to a qualified tax accountant.)

Withdrawing contributions for first home purchase

Now, here’s how your super contributions relate to FHSS…

When it's time to buy your home, you can withdraw some of your voluntary earmarked contributions under certain conditions. Currently, you can withdraw up to $15,000 of your contributions from any one year under the FHSS scheme . The maximum release amount is $50,000 across all years .

Let's say you’ve managed to contribute $16,500 annually to your super over four years. Under the FHSS, you can potentially withdraw up to $50,000 from your contributions before associated earnings (if there’s any). We say ‘potential’ because the amount ultimately depends on the sum of your eligible contributions.

• You can withdraw 100% of any voluntary contributions you’ve made to your super without claiming a tax deduction (non-concessional contributions).
• You can take out 85% of the contributions made through salary sacrifice, or tax-deducted voluntary contributions (concessional contributions).
• You may receive earnings related to the super contributions above.

It’s important to note, though, that these withdrawals can increase your taxable income for the year. Fortunately, there’s a 30% tax offset once the ATO has estimated your marginal rate (based on your recently lodged tax return). Again, eligibility and conditions apply, so make sure to read through this ATO webpage for the latest information .

If you're planning with a partner…

Each of you could use your own FHSS contributions to buy the same house together. This means you can potentially double your withdrawal for a home deposit up to $100,000. Obviously, this only applies provided you've both made sufficient contributions over the years.

Then again, buying a home doesn’t have to be a joint affair. The scheme treats everyone individually. So, if one of you has owned a home before, it doesn't affect the other's eligibility to use the scheme for a first home.

Just keep in mind: the property has to be intended as a home, not an investment property. So, if your spouse is thinking about buying a property to live in, they can still use the FHSS. But if it's for investment purposes, they'll need to look at other financing options. You and your spouse also need to pay close attention to other eligibility rules and extra requirements after the release of the funds.

While everything we’ve mentioned above sounds a bit complex at first, the tax benefits and forced savings can potentially make the FHSS worth the bandwidth. We've kept things oversimplified here to make it easier to digest. But, remember, everyone’s situation is different and there’s a lot more detail and variables under the hood.

So, always make sure to double-check the latest rules directly on the ATO website. Or, have a chat with a qualified financial adviser and tax professional for the right strategies and potential tax implications.

Risks and returns in your super

There’s a big question most of us wrestle with on this topic. When we put our money towards super for the first home deposit, how do the earnings work? How do super funds invest our money? This can get confusing because super funds can invest in a variety of assets, some of which can be volatile.

Super investment risk and adjusting your investment option

Nobody wants to park their money in a scheme to save on taxes, only to see their investment shrink if the market sours. That’s a real risk. And it’s worth considering how to navigate this without ending up on the losing side.

Hayden shared that if you decide to buy a house right after a big market drop – like what happened in the COVID crash – you might find yourself locked in losses. And that’s not an ideal scenario for anyone.

Alternatively, you can actually adjust how your super is invested. As long-term investors, we believe that timing the market almost always ends up in regret. So, if you need the money soon and you’re worried about market downturns, it’s probably best to switch to more conservative assets inside your super. ( This is going to require a bit of legwork, so make sure to do your research. )

It’s also worth mentioning that your super is a single fund, not a collection of separate accounts. So, you can’t just pick and choose parts to cash out. You have to adjust the whole fund. Again…it’s something to weigh up based on your financial security and how soon you need the cash.

FHSS associated earnings explained

Now, when it's time to pull out money for your home, the ATO has their own way of figuring out your returns. They use what’s called a deemed interest rate based on shortfall interest charge (SIC) .

It’s about 7.34% p.a. for the April to June quarter of the 2023-24 income year. This rate is a guess of what they think you would have earned in daily compounded earnings. ( It’s entirely different from the actual earnings of your contributions from investments in your super. )

For example, if you put in $10,000, you might be able to take out around $10,734 after a year or two. This includes your initial investment plus the deemed interest.

Of course, this simplifies things, as you don’t need to crunch the exact growth numbers yourself. But this gives you a good idea of how the FHSS returns and withdrawal generally work.

And if you exceeded the yearly cap for concessional contributions (again, that’s $27,500), there’s good news. You can still pull out the extra money (non-concessional contributions)…under certain conditions. This part can get technical with different tax effects, so we advise consulting a tax professional.

Yes, it’s complex and can be as dry as a bone. But understanding these details can really help you use your super effectively to buy your first home. We want to make sure we see these opportunities clearly, without tripping over the tricky parts.

Other advantages of super

In Hayden’s experience, the benefits don't end at tax savings. We’ve hinted at this above: super can potentially speed up your home deposit in two ways.

Aside from the deemed interest , your super also has the potential to earn from its investments. Depending on the market, you may see that your super has grown over a long time. But, the actual returns are based on your investment choice, contributions, and factors beyond your control (like market conditions). So, it may not be the same for everyone.

@ Super Guide

You’re also not limited to using your super for a home deposit. You can actually invest it elsewhere, like in a retail investing app to buy shares of a business. The key condition is that you buy a primary place of residence – even if you don’t use your super funds to do it. This flexibility is a big deal because it tackles a major worry many people have about super. They fear that their money is locked away for a home deposit or until retirement.

But, as always, this comes with a lot of caveats. If you don’t end up buying a home, ATO may ask you to re-contribute the money. If you want to keep the money, you may have to pay a tax equal to 20% of the assessable FHSS amount you received .

You’ll have to ask ATO for the specifics, but it’s essentially the cost of giving up your tax advantage. That said, it’s worth repeating to do your own research. And, if in doubt, consult a licensed financial professional.

Drawbacks about super

As you may have noticed, while the details are vital, they're not exactly straightforward.

Initially, the scheme seems great. You can save on annual taxes and potentially grow your contributions. But when it’s time to withdraw, there are other deductions that you need to be aware of.

Here’s a basic breakdown of what would that look like:

Concessional contributions plus interest

minus 15% concessional rate taxed by super fund

minus withholding tax ( your 2024-2025 tax rate as Australian resident plus Medicare levy , less 30% offset )

= your FHSS released amount

Hence, depending on your tax bracket, this could turn out in two ways.

If you’re a high-earner, a larger withholding tax might mean lower returns than you initially gained. For example, if you’re at a 45% income tax rate, you would still have to pay 15% withholding tax (not including Medicare levy) after the 30% offset. That’s on top of the 15% already deducted every time you made your concessional contributions.

So, while FHSSS can offer upfront tax benefits, the result is not going to be the same for everyone. The advantages can actually diminish the higher you go in the tax bracket.

In contrast, if you’re at 30% or even 37% marginal tax rate, you might pay much less in withholding tax. You would have also benefited from lower income tax every time you claimed a tax deduction. And, all things being equal , the savings from lowered income tax can potentially offset the 15% concessional tax you paid (net tax savings).

Lastly, the FHSSS exists with the intention of benefiting the tax savings and growth in investments. This is an alternative to investing via a more traditional method, such as through a savings account. However, the benefits we mentioned are not guaranteed. It all depends on where your super is invested, market conditions, timeframe, your risk tolerance, and any other tax obligations.

It’s best to talk to a financial adviser to ensure you are getting personal advice for your circumstances and situation.

Who can take advantage of the First Home Super Saver Scheme?

If we are going to follow the base calculations above, where does that leave us? Who stands to benefit the most from the FHSSS?

1. If you’re struggling with the discipline to save…
   Well, if you’ve been around the FIRE community, you’d notice that saving for a home deposit doesn’t necessarily stretch into eternity.
   With that said, everyone has different financial situations. Some might find the money just disappears. So, the FHSSS may be more beneficial for those who don’t have as much structure to save. It’s essentially forcing the savings before the money even lands into your bank account if you contribute pre-tax.
   
2. If you have a longer savings goal timeline
   Another scenario is when you’re able to save but you’re expecting it to take seven years or more. You could leverage that time to potentially boost your home deposit through super leveraging compound interest and investment returns. And, remember: you can always tweak your investment option in super to match your goals and risk tolerance, but it may be best to get advice from a professional before doing so.
   
3. If you want to lower your income tax by saving, not spending

   You don’t have to spend anything to claim tax deductions. The ATO simply rewards you for redirecting your funds into your super.
   

4. If you value flexibility into the future
   

   Some of us might invest in super not just for the tax benefits, but also to keep your options open. If you are saving for a home deposit, but then your plans change, you can always continue to boost your retirement nest egg.

As always, we're here to share experiences and insights, not to prescribe. So, if you are unsure about your situation, you can always reach out to a professional for advice.

Final thoughts

Our deep dive into the First Home Super Saver Scheme has revealed it’s a mix bag. On one hand, the FHSSS is potentially beneficial. However, its complexities might not make it a fit for everyone.

Here’s our takeaway: the calculations and numbers above hinge heavily on many factors and assumptions. At a basic level, this includes your current (and future) income, contributions, applicable tax rates and timeline for buying a home. For some, these elements align perfectly, so the FHSSS makes a lot of sense. For others, though, the confusing conditions and caveats not mentioned here may prove more hassle than help. Plus, keep in mind the government can always change rules around super as well.

So, if you're considering the FHSSS for a home deposit, remember: it's not as simple as it sounds. This isn't a decision to rush into without thorough research or professional advice.

Regardless, we are here if you need an educational guide to think through your options. So, if you’ve got questions, don’t hesitate to reach out at hello@aussiefirepod.com . You can also browse through Pearler’s superannuation articles and calculators for specific resources.

We’ll catch you in the next one, and happy investing!

Dave and Hayden