First Home Saver Account

The First Home Saver Account (FHSA) has been introduced by the government to assist individuals with saving for their first home.  From 1 October 2008, the FHSA permits individuals to receive assistance, by providing tax concessions for interest generated within the account, and by the government making contributions into the account based on personal contributions.

In the recent Federal Budget the government announced changes to this scheme making it much more attractive for first home buyers. The changes will apply after the new legislation receives Royal Assent.

First Home Savers Account

The new FHSA is essentially a savings account that will be available through certain providers such as banks, building societies, credit unions, life insurers and friendly societies.

There is a requirement to contribute into the account in four financial years in order to access the funds. If the account was opened and a deposit was made on 1 July 2009 the earliest the funds could be accessed would be 1 July 2012.

Eligibility

The eligibility criteria for an individual to open a FHSA are similar to that used for the First Home Owner Grant. The account can only be opened if the individual is:

	aged 18 or over and under 65
	an Australian resident for taxation purposes
	has not previously purchased or built a home in Australia to live in
	has not previously opened an FHSA – which means only one account can be opened by an individual
	quotes their tax file number, and
	meets the standard proof-of-identity requirements.

Contribution Rules

Maximum contributions

A maximum contribution cap applies to FHSAs. Co-contributions into the account will stop once the account balance reaches $75,000 (indexed). This amount will be indexed annually, but only in $5,000 increments.

After-tax contributions limit

Contributions into an FHSA can only be made from an individual’s after-tax income. Salary sacrifice arrangements will not be permitted.

Contribution Concession

The Government will make co-contributions of 17% into an FHSA each year for every dollar of personal contributions up to $5,000. This means that the Government’s co-contribution is capped at $850 per financial year per account on a personal contribution of $5,000 or more.

You will not need to apply for the Government co-contribution. The Government will pay the eligible amount directly into your FHSA at the end of each relevant income year.

Tax Concessions

Any contributions into a FHSA will not be subject to tax. Interest earned in the account will be taxed at a flat rate of 15%. The tax on the interest will be administered by the financial institution. Additionally, eligible withdrawals will be tax-free if used to purchase or build your first home once the minimum holding period has been fulfilled.

Withdrawals from a FHSA can only be made in two circumstances in order to be tax-free:

1. Withdrawals for purchasing or building a first home

Individuals can withdraw the balance of their FHSA tax-free for purchasing or building a first home. However, the entire account balance will need to be withdrawn and the account closed.

Certain criteria need to be satisfied for an individual to make a withdrawal for a home:

	Contributions of at least $1,000 must have been made into the account in four or more years since the account was opened. The four contributions do not need to be in four consecutive years.
	The home must be located in Australia and be a new or established house or similar dwelling that can lawfully be used as a place of residence.
	The account holder will be required to live in the home for a continuous period of six months commencing within 12 months of settlement or completion of construction.
	The account holder must not have previously bought or built a home to live in; an investment property is exempted.
	The withdrawal must be for the purpose of making a payment directly to purchase or build your first home.

2. Withdraw from a FHSA and transfer into a superannuation fund

An individual’s entire balance in their FHSA can be transferred into their superannuation fund at any time. However, note that you will not be able to open another FHSA. If you are over 60 the balance of the account can be withdrawn.

The amount transferred into your superannuation fund is treated as a non-concessional contribution and is counted towards the $150,000 cap (or $450,000 cap under the three-year averaging rules for people under the age of 65) for non-concessional contributions. This means that you will still be able to make deductible contributions of up to $25,000 into superannuation in the same year, and pay 15% tax on those contributions, as the transfer does not affect your concessional contribution limit.

The amount transferred will not be eligible for the superannuation co-contribution concession.

3. Withdraw from a FHSA and pay into approved mortgage

Once the new legislation is passed, you will no longer be required to lock up your savings into super if you do not use the funds to purchase a home. Rather, after a four year minimum qualifying period you will be able to transfer your savings into an approved mortgage without penalties.

Misuse Tax

The Government can retract any benefit obtained by improper use of the accounts.

You have six months from when the funds begin to be withdrawn from the account to apply all the funds against the purchase or construction of a home. Failure to do so can attract misuse tax.

Misuse tax is applied if the account is not used in the prescribed manner. The tax will effectively reverse any benefit received by operating the account, including any co-contributions and the reduced tax on interest.

Published : June 2010