Making First Home Saver Accounts flexible

Fabian Bussoletti explains how to increase the flexibility of First Home Saver Accounts.

Proposed legislative amendments recently introduced into Parliament will, if passed, increase the flexibility of First Home Saver Accounts (FHSAs), making them far more attractive to eligible first home buyers.

Under the current rules applicable to FHSAs, a minimum holding period must be satisfied in order to have money invested in a FHSA released for use on the purchase of a home.

Typically, the current minimum holding period is satisfied at the earliest of the FHSA holder:

• Having made a minimum contribution of $1,000 in at least four financial years (not necessarily consecutive); or
• Exceeding the maximum account cap (currently $80,000) and having held the account in at least four financial years.

Unfortunately, what this means is that under the current rules, where a home is purchased prior to the holding period being met, the money in the FHSA must be transferred to the individual’s superannuation or retirement savings account.

Proposed amendments

Under the proposed amendments – which will apply to homes purchased after the day the legislation receives Royal Assent – if a home is purchased prior to meeting the minimum holding period, the account will no longer be immediately closed. Instead, it will be retained as an inactive account which means it will be unable to accept further contributions – other than government contributions.

As contributions will no longer be able to be made once a home has been purchased, the proposed amendments will deem contributions to be made for the purposes of satisfying the minimum holding period requirement.

The benefit of these proposed amendments is that an individual will be able to keep their inactive account open until they meet (or are deemed to have met) the minimum holding period. And, at that time, the money can then be released for payment to a genuine mortgage.

Case study one

In August 2009, Nina opened a FHSA. In that financial year she contributed $2,000 to the account. In July 2010 (ie, the next financial year) she only contributes $500. Then, in the 2011-12 financial year, Nina purchases her first home.

Although Nina’s FHSA has been open in three different financial years, she has only contributed the minimum contribution of $1,000 in one of those years (being the 2009-10 year).

Therefore, the account will need to be open in a further three financial years (with the acquisition year of 2011-12 counting as one of them) before the money will be released to go towards Nina’s mortgage.

The years which will count towards the release conditions are 2009-10 (where $2,000 was deposited) and the following three financial years under the proposed deeming amendments.

So, even though Nina will not be able to contribute any further money to her FHSA now that she has purchased her first home, she will be able to withdraw her money and put it towards her genuine mortgage from 1 July, 2013 (ie, the start of the 2013-14 year).

Case study two

After receiving an inheritance of $75,000, James opens a FHSA into which he contributes the full amount of his inheritance. The following financial year, James does not contribute any further funds to his FHSA.

Due to the account earning interest and James receiving the maximum government FHSA contribution, by the end of the second year the balance in James’s FHSA is now $77,000.

In the third financial year, James places a further $3,000 in his account. Later that same year, James purchases a home.

Although James has only made contributions of $1,000 or more in two different financial years, he has reached the $80,000 maximum cap, and his account has been open over three financial years.

As such, from the start of the following financial year, James will be able to use the funds in his FHSA towards the mortgage on his new home because he has reached the maximum cap and his FHSA has been open in four financial years.

The benefits of FHSAs

With these proposed amendments set to provide greater flexibility to account holders, it also provides a timely opportunity to revisit the merits of using these types of accounts to help eligible individuals save for their first home.

Two of the more attractive features of FHSAs are:

• They enjoy concessional tax treatment similar to superannuation accumulation accounts. That is, investment earnings will be taxed at 15 per cent within the account; and
• Currently, the first $5,500 contributed into a FHSA will attract a matching Government contribution of 17 per cent. However, unlike the superannuation co-contribution, the FHSA Government contribution is not means tested and is available to all individuals who are eligible to open and maintain a FHSA.

So, for an eligible individual who is looking to save for their first home, how attractive will a FHSA be when compared to investing in their own name?

From the results in table 1, we see that when a FHSA is used to save for an eligible individual’s first home, they provide a better alternative to simply saving in one’s own name, with the longer the investment time frame, the greater the benefit.

Should the proposed amendments become law, creating greater flexibility for account holders, FHSAs are likely to receive a greater level of interest from eligible first home buyers as well as their financial advisers.

Fabian Bussoletti is a senior technical analyst at AMP.