The Turnbull government’s plan to allow first home buyers to direct up to $30,000 of superannuation savings into a housing deposit could end up draining super accounts and costing savers more than using a traditional bank account.
Stephen Anthony, chief economist with Industry Super Australia, said the First Home Super Saver Scheme, sold by the government as a housing affordability measure, would offer limited benefits to first home savers and threaten retirement savings.
The plan, introduced in the May budget, allows first home buyers to salary sacrifice up to $30,000 into their super account at a maximum rate of $15,000 a year.
The savings are taxed at the super rate of 15 per cent on the way in, which is lower than the 19c bottom tax rate and so gives you a benefit. When funds are withdrawn they are taxed at the marginal rate of the saver less 30 per cent.
This is where the plan strikes trouble. The ATO doesn’t simply tax the money you take out when you buy a home, it will assume you made a return on it that is equivalent to the bank bill rate (what banks pay professional investors) plus three per cent.
That guaranteed return is added to the amount you withdraw, which is fine if your super fund is earning that amount or more. But in years when your super fund makes less than that benchmark, money is effectively being taken out of the rest of your super to make up the figure the taxman wants you to have.
“Super funds will be forced to dip into compulsory savings to cover shortfalls in ‘guaranteed’ returns, leaving people with much less at retirement,” Dr Anthony told The New Daily.
Those transfers from your super to fund your home deposit can be significant. For the year to June 2016, for example, using the ATO’s formula would have seen you transfer an average of 2.3 percentage points of your general super returns into your deposit savings account, ISA research says.
There are other problems with the proposal, due to go before Parliament in the second half of the year, as well. While it might look attractive at first blush, the savings you think you’re making are less than they appear.
The super contributions tax will take a significant bite from your fund.
“People must also understand that after paying super contributions and earnings tax, the $30,000 put into the scheme could be worth as little as $25,000 on withdrawal,” Dr Anthony said.
People are likely to forget that if they had saved the money into a high interest savings account they would have avoided to the contributions and earnings tax as well as getting interest on their deposit.
For people carrying HECS/HELP debt from their tertiary education days, the benefits are even less. That’s because they have to pay back their debt once they hit relevant income targets.
Add all that together and the overall benefits from the scheme shrink significantly, as the chart above demonstrates.
Eva Scheerlinck, CEO of Australian Institute of Superannuation Trustees, said the plan is in conflict with the aim of super because it diverts benefits to current housing needs.
“The use of a super fund for a deposit on a first home is inconsistent with the sole purpose test which requires that super funds maintain benefits for members’ retirement or for insurance-related purposes,” she said.
“It is also inconsistent with the government’s own stated objective of superannuation to provide income in retirement.”