20 May 2010

Reform of First Home Saver Accounts

The Federal Budget delivered a win – albeit small – for first home buyers and the general media has virtually ignored it.

The seriously under-used First Home Saver Accounts (FHS), which were designed to provide a simple, tax effective way for Australians to save for their first home through a combination of government contributions and low taxes, have been reformed.

The FHS were part of Labor’s 2007 election pitch and this overhaul is a second attempt to make them more flexible.

Currently, an FHS Account holder is required to keep their savings in an FHS Account for four financial years before they are able to use those savings to buy a home.

If the account holder buys a home prior to the end of that four-year period, the balance of their FHS Account must be transferred to their superannuation so that it remains in a ‘concessionally’ taxed environment.

Despite tax concessions and government contributions worth up to $850 a year only a small percentage of first home buyers have to date been willing to commit to the four-year minimum period due to the steep rise of house prices.

To increase the flexibility of FHS Accounts the Government will allow savings in an FSA Account to be paid into an approved mortgage after the end of a minimum qualifying period, rather than requiring it to be paid to a superannuation account.

This translates as people being able to buy a house and later use the savings to pay down their debt.

The Government will release draft amendments for consultation over the coming months.

The changes will apply for houses purchased after Royal Assent of the legislation (the final stage of the legislative process) giving effect to this change.

FHS Accounts will still offer all the existing concessions to help Australians buy their first home:

1) Currently the Government contributes 17 per cent on the first $5,000 (indexed) of individual contributions made each year. That means an individual who makes a contribution of $5,000 to their FHS Account will be eligible for a Government contribution of $850.

2) There is a cap of $75,000 (indexed) on the overall FHS Account balance. If an individual reaches the cap, no further individual contributions can be made by the FHS Account-holder. However, the FHS Account interest earnings and outstanding government contributions will still be credited to the FHS Account after this time, allowing the account to continue to grow.

3) Individuals who are members of a couple will be able to pool their FHS Accounts to purchase a home together.

4) Earnings are to be taxed at 15 per cent and withdrawals will be tax free where they are used to purchase a first home.

Whether this improvement to First Home Saver Accounts will help Australians buy their first home sooner without placing additional stress on the housing market is yet to be demonstrated.

The Budget announcement was made hot on the heels of the release of figures that show big increases in capital city house prices despite the winding back of first home owner grants.

Regarding housing affordability, the Real Estate Institute of Australia (REIA) has expressed disappointment that the Government has not considered long-term solutions to address the issue in the Federal Budget.

The REIA proposed two recommendations for consideration in its pre-budget submission, which were aimed at long-term solutions for housing affordability in Australia.  The first was to index the grant to median house price movements annually and the second was to allow first home buyers access to voluntary superannuation contributions.

“We asked the Government to consider increasing the FHOG to $15,000, for both new and established homes, and then index the grant to median house price movements annually. As part of a package of measures to address the affordability problem, REIA also proposed that the Commonwealth Government establish a scheme to encourage young Australians to contribute to voluntary superannuation and allow access to super to raise a deposit for a first home,” said REIA President, David Airey.

“We note and support the changes announced tonight to the First Home Saver Accounts that will allow money from the accounts to be paid to an approved mortgage at the end of the minimum qualifying period, but this is not a long term solution to the housing affordability issue,” Airey said.

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