First Home Buyers: What the 2017 Budget means to you
The 2017 Budget delivered by the Government overnight plans to tackle housing affordability for first home buyers.
First Home Buyers, without the buying
According to some statistics, the average time taken to save for a deposit in Sydney is around eight years while in Melbourne it's six years.
Some people blame foreign buyers when in reality they make up bugger-all of the market.
Others blame negative gearing, which is only an issue if you don't understand how it works. Of course, there are financial stability concerns around too much negative gearing in the economy but, chances are, most of our parliamentarians are negative gearing properties, so even if the economic proverbial hits the fan we are unlikely to see any real change.
Other people blame record-low interest rates for high property prices, which is probably the number-one reason for high house prices.
Then, there are the avocados…
Mmmm, delicious.
Urban density, more people wanting to live close to the city, is another reason for high house prices. What do you mean, lower my expectations?
Population growth, which currently stands around 1.5%, is a massive challenge.
Together, these issues mean that we have fewer houses for more people. And interest rates have only made it easier for people to take on more debt and push up house prices.
What doesn't help first home buyers
State Government grants for first home buyers are an absolute disaster, especially when prices are high.
You see, immediately after a Government announces a grant, house prices rise to reflect the 'free money' available. But not only do grants make it harder for you to buy a house — it makes it even harder for next year's first home buyers.
Using all of our superannuation to buy a house is also a poor choice. There are many genuine reasons why superannuation is separate from personal investments.
Rant over, what's changed in the 2017 Budget?
To combat this political issue, the 2017 Budget paved a sensible middle-ground for first home buyers like you and me.
Under the old rules, we — just like our parents — would save money in a bank account for a year or two until we had enough cash to ask the bank if they wanted to become partners in our Australian dream.
As part of that process, we would pay tax on our salary, as well as a tax on the bank interest. Essentially, we would be taxed on our wage and on the interest received from the term deposit or savings account while we saved up. This would be done at our marginal tax rates.
However, as part of the 2017 Budget, first home buyers can make voluntary contributions to Superannuation, which can then be withdrawn for a first house deposit.
How does it work?
Ordinarily, we pay income tax when we receive our income. However, under the new rules, we can contribute straight to super from our employer as part of a salary sacrificing arrangement. That means, the money the employer sends to super (on your behalf) is taxed at 15% (the Super rate) and NOT at your marginal tax rate. That's a saving.
Note: Self-employed folks can also make voluntary concessional contributions to superannuation.
These contributions are in addition to the regular superannuation guarantee contributions, which are paid quarterly by your employer. These cannot be withdrawn until later in life.
The superannuation fund will keep a record of the assets you voluntarily contribute, along with any earnings. And because the earnings are inside superannuation, they will be taxed at 15% — not your marginal rate.
Important point: When these separate contributions are withdrawn from superannuation, you will be taxed again at your marginal tax rate. However, the Budget scheme is introducing a tax rate reduction of 30%.
For example, if you put $10,000 into super for the next two years ($20,000 in total), as part of a salary sacrifice arrangement with your employer, your money will be taxed at 15%. So, your super fund account would show contributions of $8,500 per year.
Any gains would be taxed at 15%.
Then, when you decide to put down a deposit on a house you will be taxed at your marginal rate (e.g. 37%) minus the 30% reduction (for a tax rate of 7%).
It might not sound like much of a benefit, but it will help those of us that are willing to keep an eye on our budgets.
Depending on how much you put into super and your tax rate, the benefits could be upwards of $6,000 in tax savings.
Things to know
- An individual can contribute a maximum of $15,000 in a financial year, and $30,000 in total
- The rates for couples double (e.g. $30,000 and $60,000, respectively)
- The new system applies from 1 July 2017 and withdrawals cannot be made until 1 July 2018
Foolish Takeaway
As a first home buyer, I can appreciate why many of us complain about buying a house. But please remember that there is no rush to buy a house. Sure, you may value the security, but there are plenty of other investments you can make to grow your wealth while you wait for more compelling prices.
