Another super challenge

Following its election commitment to introduce a First Home Saver Account (FHSA) system, the Government has released a discussion paper in relation to these accounts. It is intended that these accounts will be made available from July 1, 2008, for those institutions and financial entities such as trustees of superannuation funds, life offices, banks and credit unions that choose to establish them.

Mercer believes that based on the amount of work it expects will be involved in setting up these accounts, it is unlikely that many institutions or funds will actually have them in place by July 1.

According to Russell Mason, national practice leader for Industry Superannuation with Mercer, the establishment of FHSAs is a welcome initiative by the new Rudd Government. However, superannuation fund trustees should be aware that, in establishing these accounts, there are a number of administrative issues that may ultimately prove to be unattractive to those individuals targeted by the Government as the likely beneficiaries of the initiative.

Under the initiative, members of superannuation funds will, subject to their trustee establishing a FHSA, be able to contribute a maximum of $10,000 per year over a period of at least four years towards a deposit for their first home purchase. Under the rules announced by the Federal Government, this option is only open to individuals who have not previously owned a home to live in. Contributions can only be made on an after-tax basis, with the earnings being taxed at a maximum rate of 15 per cent, as is the case with superannuation contributions. The amount can be withdrawn from the FHSA with no further tax being payable when it is used for the purchase of the member’s first home.

According to Mason, this is a good start; however, Mercer believes further refinements to the system are required to make FHSAs more attractive to first home buyers. Under the proposed legislation, only registered superannuation entity licensees with a public offer licence can offer a FHSA. This will automatically exclude many standalone corporate funds and exempt public sector funds from offering a FHSA. Mercer believes this discriminates against these funds and sees no sound reason why non-public offer funds should not be allowed to also offer FHSAs.

Additionally, the FHSA will have to be set up under a separate trust to the superannuation fund and cannot be included within the fund. Mason pointed out that he expects this will greatly increase the costs of establishing and running a FHSA, consequently diminishing the incentive to offer them.

Mason also pointed out that under the Australian Prudential Regulatory Authority interpretation of the sole purpose test, a FHSA offered within a superannuation fund would breach the sole purpose test. However, he believes that this is largely an administrative problem and the Government could easily pass legislation that would eliminate the potential for a sole purpose test breach. In Mason’s view, the trust structure of a superannuation fund is well suited to incorporating FHSAs and that, on many levels, the establishment within a fund of a FHSA would be akin to adding an additional investment option.

Mason concluded by stating that Mercer believes other technical aspects of the FHSA legislation needed to be reviewed for practical operational sense. In particular, the four year period, which may discourage some younger members from locking their money in for that length of time, and the general inability to access the money before retirement where the member decides not to purchase a home or purchases one before the four year eligibility period has ended. Requirements to transfer the account to a superannuation fund in certain situations such as death or financial hardship also need to be revisited.

Overall, Mercer feels the Rudd Government’s FHSA initiative will be a positive attraction and benefit for those saving for their first home, however, the easier it can be made in terms of flexibility for members and administration for superannuation funds and other providers, the more likely it is to be a success.