It is not news to anybody that housing is unaffordable. The government has put in place Band-Aid solutions that they believe will make housing more accessible for those looking to break into the property market in a variety of first home buyer’s schemes.

Most are relatively straightforward. In most states, first home buyers have a variation of the same policy where they avoid stamp duty if they meet purchase price conditions. There are other policies that are situation specific, such as this NSW-based policy that allows lower deposits to those in occupations such as police officers and paramedics. One federal policy however, involves contributing and pulling out funds from superannuation accounts – the First Home Super Savers Scheme (FHSSS).

How it differs from other schemes

There are a few ways that the First Home Super Savers Scheme differs from other first home buyer policies:

• No requirement to be an Australian citizen, resident, or resident for tax purposes (although those who are residents for tax purposes have different tax treatment for the scheme)
• You can purchase with someone else who has already owned a property
• You are using your own contributions, instead of having deductions or exclusions to costs such as stamp duty.
• You can use FHSSS as a supplement to other government schemes

Does it help first home buyers?

The purpose of superannuation is singular – it is to provide for retirement. So why has it been repurposed as a vehicle for getting into the housing market?

Proponents would say that purchasing a house contributes to a more comfortable retirement. In fact, it is the basis for ASFA’s figures for a comfortable retirement.

However, FHSSS is a Band-Aid over a gunshot wound. As of April, the median house price in Sydney is $1.6 million dollars. The tax savings (as we will see below) are minimal when it comes to addressing the issue of an affordable deposit and mortgage. This is a weak solution to the property crisis, not coming close to a genuine attempt at reforming the situation. For example, $1.6 million is well over the threshold where first home buyers in the state can avoid stamp duty. It is a similar situation across other states and territories. FHSSS offers a few thousand dollars of respite and then state governments slap first home buyers across the face with $50,000+ in stamp duty if they dare buy a property over $800,000 (in NSW).

How it works

The scheme has been running since 2017. It allows individuals to contribute on top of their employer contributions – either concessional or non-concessional contributions (explained below), with the intention of using those contributions towards a property purchase. The maximum amount that can be pulled out of superannuation would be $15,000 per year, to a total amount of $50,000.

These are the tax treatments for the two types of contributions:

Concessional: These contributions would be salary sacrifice or employer contributions. A 15% tax is levied upon entry into the superannuation fund. For example, if you salary sacrifice $10,000, the net contribution would be $8,500. While it is in the superannuation account, you will only pay 15% on earnings as opposed to your marginal tax rate.

Non-concessional: These are post-tax contributions. For example, if you have $5,000 in your bank account. You contribute $5,000 and pay no additional contributions tax. This is because you have already paid tax on your earnings before it hits your bank account.

The FHSSS in practice

The best way to explain the scheme is that you are able to contribute into super and receive tax benefits that will accelerate saving for your deposit. Let’s go through how it works.
You and your partner decide that you want to purchase a home and want to start saving for a deposit. Your goal is to purchase a house in three years.

You both earn $150,000 a year, and your employer contributes $17,250 in Super Guarantee* contributions per year. This would be $14,662.50 per year after the 15% contributions tax.

There is a concessional contribution limit of $27,500 per year, which means that you are able use the rest of the cap and contribute $10,250 extra per year. This is $8,712 after the 15% contributions tax.

You are also able to make non-concessional contributions into your superannuation account. However, this is discouraged by the system as you are essentially double taxed. You are taxed at your marginal tax rate before you put the money into super, and then when you withdraw the funds. For this reason, you choose only to make concessional contributions. The example will illustrate this further down.

You continue this investment strategy for three years. Those taking part in the scheme can decide to use the scheme for a shorter or longer period. However, keep in mind that you are only able to withdraw $15,000 of contributions per year to a maximum of $50,000.

At the end of the three years, you and your partner have invested:

Concessional contributions: $30,750 or $ 26,137 after contributions tax each.

Withdrawing your FHSSS savings

You are able to withdraw a maximum of $50,000 from your superannuation for the FHSSS. It can only come from voluntary contributions and cannot come from the employer contributions that were made into your account.

However, you also receive ‘earnings’ for the period. This is earnings given on top of your contributions. To calculate this, the ATO – who owns the administration of the FHSSS – will use the shortfall interest charge rate (90-day bank bill rate plus 3%). To be clear, these ‘earnings’ have no correlation with how your super has performed. The actual growth in your super fund may be more or less than the ATO deemed earnings depending upon the performance of the investments in your super account. For the July-September quarter 2024, the rate is 7.36%.

This would mean that you would have $30,051.29 individually and $60,102.58 across you and your partner.

However – there is a tax upon withdrawal. This tax is your marginal tax rate in the last financial year minus 30%. As the tax rate for a $150,000 salary is 39%, the withdrawal would be taxed at 9%. We can see from these steps that investing non-concessional contributions is detrimental to your savings goals. It is taxed once at your marginal tax rate, and then taxed again when taken out. For high income earners, this means that this scheme has very little wiggle room after employer contributions are made. If you do choose to use the FHSSS, it may be worth using a combination of savings inside and outside of super.
Your final amount after the tax at withdrawal is $54,692 collectively.

To understand whether it is worth partaking in the scheme, there needs to be a point of comparison. This would be saving for your deposit outside of super.

The $10,250 originally contributed would attract an effective tax rate of 29%**. This would be a $7,277 contribution per year, $1,435 less per year than the FHSSS. In terms of earnings, it would be folly to put this into equities for a three-year time period. Although it is not an apples-to-apples comparison, a more realistic rate would be one that you could get from a High Interest Savings Account (HISA). A 4% p.a. rate would give $22,544.45 after income tax. This would mean $45,088 with your partner.

FHSSS comparison

My concerns with the FHSSS

Misaligned asset allocations for disparate timelines

We’ve mentioned the purpose for superannuation – it is solely for retirement. That means that your superannuation is invested for decades, and not for a 3-4 year period. Your asset allocation is likely geared towards aggressive assets and assets within your fund will bounce around in the time that you are saving for your house deposit.

Say that you find a house to purchase. You have no control over whether the asset classes within your super have gone up or down over the last three years. Where you run into trouble is if the market has dropped significantly, and you are drawing down on the assets when they are at depressed levels. This is the risk of investing with a short time horizon.
We can go through an example to see how this scenario can impact returns. You have $1,000 to start and the market falls - you lose 20%. Your investment is now valued at $800. A 20% gain on this now only restores your investment to $960, meaning that you would need 25% to bring you back to square. What this means is that you are now in a position where your money needs to work harder for you to even break even.

If we were to look at a more severe scenario where you have $1000 and lose 50%, that will bring you to $500. A 50% gain only restores your value to $750 – you now need a 100% gain to get you back to square. This will hinder your superannuation balance and retirement goals.

(Potentially) impacting your retirement savings

Adding to this, the 7.36% deemed earnings sounds attractive. This money has to come from somewhere. Your superfund will have earned returns within this period, but if it is less than the high watermark of 7.36%, you will be taking from your employer contributions. This will impact your retirement savings.

The complexity to remain eligible

The other issue with the FHSSS is that it is complex and requires a lot of hoop jumping. To write this article, I had to go through the parliamentary papers to understand how the deemed earnings was calculated – it still wasn’t entirely clear. There is a calculator that has been developed to help take some of the guesswork out of it. Here are some of the criteria to make sure that it works out:
• You need to be in a superannuation fund that allows you to participate in the program
• You need to allow for around 25 days to access the funds
• You need to find a home within 12 months, with the ability to extend to 24 months from when you have accessed the funds. If you do not meet this condition, a 20% tax on your assessable FHSSS amount will be charge.
• You need to be sure that you are purchasing a home. The savings that you put into superannuation cannot be pulled out for another financial goal if you change your mind – it will stay in your superannuation until you meet a condition of release. This is not necessarily a bad outcome, but the inflexibility could hinder you with a change of circumstances. For example, your career takes you overseas and you resettle, wanting to purchase a home overseas.

How does it impact your superannuation balance?

The FHSSS will impact your balance if the deemed earnings are more than the returns earned by your savings. It also means that the tax effective concessional contributions may be reserved for a house deposit instead of contributing extra towards your retirement savings^. It is an opportunity cost to consider.

How are people using the FHSSS?

The ATO released figures every financial year that gives us insights into how people are using the FHSSS including who they are. The majority of applicants are between the ages of 26 and 40 (78%) in New South Wales and Victoria. 65% earn between $45,000 and $120,000.

Interestingly, there were 4,200 release requests in the year after the scheme was established – showing that it was likely applicants that were looking to access funds that were not intentionally invested for this scheme.

The number of applicants grows steadily each year. In the 2022 - 2023 Financial Year, there were 8,700 payments made to individuals, with an average payment of $17,100. Before release, you must request a determination that will outline the total eligible funds and earnings after tax. Only 34% of determinations resulted in a release request.

What we can see from this is that some of the applicants to the scheme are those that are looking to access extra savings for their deposit without intentionally using the scheme. If you were to consider using FHSSS, the implications on your retirement cannot be ignored. It is using limited allocations with attractive tax advantages (concessional contributions). Using the scheme must be done with intention and considering how it impacts longer term goals.

Is it worth it?

Here is the summary:
• You can gain a tax advantage through the FHSSS
• You may dip into your retirement savings through the deemed earnings component
• You need to be certain that you are purchasing a house, otherwise the savings may be locked in your super account until retirement
• If you withdraw funds when equity markets are depressed, it may severely impact your retirement savings.
• Non-concessional (after-tax) contributions may not be worth considering for the scheme – they are taxed twice.
• High income earners may not find as much value in the scheme as employer contributions may take up the majority of their concessional contributions cap.

Ultimately, whether it is worth it is for you to decide. There are tax savings to be made from the scheme that will bolster your house deposit. However, the scheme is restrictive, and you must be certain that you are going to use the funds to purchase a house - otherwise, you may not see those savings again until retirement.

*11.5% used for the 2024/2025 Financial Year.

^You may also utilise the bring-forward rule for concessional contributions for retirement savings.

**A 39% marginal tax rate, with a 29% effective tax rate across the year.