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Buying property with your super
September 18, 2017
Hotly-contested changes in the 2017 Budget have promised to open the property market to first home buyers by allowing property seekers to access their super savings – so what do these changes mean, how can you make the most of them and most importantly, should you?
What are the changes?
As of July 1, 2017, individuals have been able to make additional, voluntary contributions to their superannuation funds in order to eventually withdraw these savings and the earnings generated from them from July 1, 2018. Up to $15,000 in voluntary contributions can be made each year, with a maximum of $30,000. Individuals will be able to withdraw this maximum of $30,000 and couples are free to combine their savings to make single deposits, reducing the time necessary in saving for a deposit.
These changes are intended to help fight the challenge of housing affordability in Australia and have attracted a range of opinions from financial pundits. The policy, announced by the Australian Government, is projected to cost $250 million over four years.
Why make changes to super?
Despite the warnings the global financial crisis offered in relation to an inflated real estate market, house prices in Sydney alone have increased by 113.7% since January 2009, with the combined increase in house values across Australia’s capital cities at 72.4%. With these huge increases in property values and relatively low wage growth in the same period, housing affordability has become a major concern for voters nationwide, and as such a major concern for Australian politicians.
Voluntary contributions to individuals’ superannuation accounts has been a hotly debated policy change, with some claiming that it will only drive house prices up, especially within inner-city areas, and others claiming that it will destabilise the value of super and negate the entire purpose of superannuation, which is to create a bedrock of financial support for retirees, who can withdraw their super tax-free from age 60. On the other hand, the Federal Government and other experts have claimed that these changes will help first home buyers by reducing the time required to save for a property, which has increased from an average of six years in Sydney to eight years.
Benefits and risks to the scheme.
The greatest benefit as just mentioned is that this scheme will help potential home owners save for their homes more quickly through the benefit of paying 15% tax on contributions on an individual’s pre-tax income, while withdrawals will be taxed at 30% less than an individual’s marginal tax rate.
At an early stage in its life, the scheme reveals issues that first home buyers should be aware of, the largest of which is that the policy is yet to go through parliament and turned into legislation.
Secondly, according to the proposed policy, members do not currently need to inform their super provider of what their additional contributions will be used for. The reason why this can be considered as a risk is that these providers will have to guess at how long contributions will remain within accounts before being withdrawn, and as such have the adequate liquid assets to cover these withdrawals. A lack of significant long-term data about customer usage trends and proper legislation may prove to be a major challenge for superannuation funds and be a reason why experts have claimed that the value of super assets may be compromised.
Queries have been made by the media to the Federal Government about the details of withdrawing any savings made through the scheme. For instance, what checks individuals will need to satisfy in order to qualify for the withdrawal. Will there need to be an impending property purchase before a withdrawal can be made, for instance?
As a potential home owner seeking a way to accelerate your savings efforts, the government’s super scheme may be a valuable savings tool. However, caution needs to be taken before investing significant funds into a policy that remains to have its legislation finalised and as such risk having your savings locked within your super fund if the policy fails to get through parliament. If you have the freedom to do so, wait for the policy to go through parliament and find out the particular details about how the ATO will judge whether you are eligible to withdraw your savings.