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INCENTIVES FOR FIRST HOME BUYERS
With interest rates and house prices falling, many first time buyers are contemplating entering the property market. This article looks at incentives currently being offered by the government to first home buyers.
First Home Saver Accounts - Introduction
As promised during the 2007 federal election campaign, the Labor government has recently introduced First Home Saver Accounts (FHSAs). From 1 October 2008, FHSAs provide a tax effective way for individuals to save for their first home.
This is achieved in the following two ways:
In order to open an FHSA, you must satisfy the following criteria:
Example
Edgar owns two rental properties which he purchased in 2006. These properties have been rented out and have never been lived in by Edgar. Provided they have never been his main residence, Edgar's ownership of these properties does not disqualify him from establishing an FHSA. Couples planning on buying their first home should note that a joint FHSA is not available. However, to get the most out of the scheme, couples can set up separate accounts (i.e. one account per person). By doing so, each account is eligible for both the tax concessions and for the full government contribution.
Government Contribution
Contributions may be made by the account holder themselves or another party (e.g. employer or parent) on behalf of the account holder. All contributions must be made from after-tax income (you cannot salary sacrifice into an FHSA). For each year, the government will contribute 17% of the first $5 000 (indexed) of individual contributions made by an account holder (or made on their behalf by an employer or parent etc). Therefore, if an account holder (and other parties contributing on their behalf) makes $3 500 of contributions for the 2008/2009 income year, the government contribution will be $595 ($3 500 x 17%). The maximum government contribution for the 2008/2009 income year is $850 (this maximum will increase in future years as the $5 000 limit is indexed). Any amount contributed by you (or on your behalf) above $5 000 (for the 2008/2009 income year) will not be eligible for the government contribution.
To be eligible for the government contribution in an income year, you as the account holder must:
In May 2009, Simon was sent to London for two months by his employer in order to perform work for a client (he had been in Australia for all of the earlier part of the income year). In April of that year, Simon established an FHSA and his parents, as a parting gift, contributed an amount of $6 000 in that same month. Even though not physically present in Australia, Simon would likely be regarded as a resident for tax purposes and would therefore (provided he lodged a tax return) be eligible for the government contribution. Simon would receive the maximum government contribution of $850 ($5 000 x 17%) even though the contribution was not made by him personally. The amount above $5 000 would not be eligible for the government contribution.
Tax Concessions
The following tax concessions apply to FHSAs:
Account Balance Limit
There is a limit of $75 000 (indexed) on the overall account balance. If you reach this limit, no further contributions can be made. Contributions exceeding the limit will be returned to the account holder.
Withdrawals
You are able to withdraw your account balance tax-free to purchase or build a dwelling (or an interest in a dwelling) in which to live. Upon doing so, the entire balance must be withdrawn and the account must be closed. Further, the entire= account balance must be used to purchase or build within six months of the withdrawal. To withdraw your funds, minimum contributions of $1 000 need to be made over the course of at least four separate financial years.
Alternatively, rather than purchase or build a dwelling, you can withdraw your account balance, close your account and contribute the entire amount to your superannuation fund at any time. Amounts can also be withdrawn in the following exceptional circumstances:
Occupancy Rule
Having withdrawn your account balance and purchased or built your new dwelling, you must then use your dwelling as your main residence for a continuous period of at least six months over a 12 month period. This 12 month period commences at the time the interest in the dwelling is acquired or when, in the case of a new dwelling, construction is completed.
Example
Mitchell withdraws his entire account balance and purchases his first home on 1 April 2009. He must use that dwelling as his main residence continuously for at least six months in the period between 1 April 2009 and 1 April 2010.
Opening an FHSA
FHSAs can only be held with recognised account providers.
Increase in First Home Owner's Grant
Along with the advent FHSAs, the First Home Owner's Grant (FHOG) has been increased.
The FHOG was introduced by the Federal government on 1 July 2000 to offset the impact of the GST on the property market. The FHOG is separate from the FHSA, and all first home buyers are entitled to avail themselves of both schemes, subject to the respective eligibility criteria. Briefly, the principal difference between the schemes is that while an FHSA assists participants in saving for a new home, the FHOG is not savings-based but is rather a direct payment to those who are eligible. Until recently, the FHOG was a $7 000 payment to persons aged at least 18 who are Australian citizens or permanent residents and are buying or building their first home in Australia.
However, in early October 2008 as part of a $10.5 billion package designed to stimulate the Australian economy, the government announced that, effective 14 October 2008:
The FHOG is administered by the various state revenue offices around Australia. For more information or to apply, you should contact the office in your state or speak at an adviser at International Professional Services.
Source: Australian Taxation Reporter January/February 2009
With interest rates and house prices falling, many first time buyers are contemplating entering the property market. This article looks at incentives currently being offered by the government to first home buyers.
First Home Saver Accounts - Introduction
As promised during the 2007 federal election campaign, the Labor government has recently introduced First Home Saver Accounts (FHSAs). From 1 October 2008, FHSAs provide a tax effective way for individuals to save for their first home.
This is achieved in the following two ways:
- By concessionally taxing investment account earnings; and
- The government matching personal contributions to the account holder's account.
In order to open an FHSA, you must satisfy the following criteria:
- (A) Be aged 18 or over, but under 65;
- (B) Not have previously purchased a new dwelling that has been your main residence;
- (C) Not have previously opened an FHSA; and
- (D) Have provided your tax file number (TFN) to the account provider.
Example
Edgar owns two rental properties which he purchased in 2006. These properties have been rented out and have never been lived in by Edgar. Provided they have never been his main residence, Edgar's ownership of these properties does not disqualify him from establishing an FHSA. Couples planning on buying their first home should note that a joint FHSA is not available. However, to get the most out of the scheme, couples can set up separate accounts (i.e. one account per person). By doing so, each account is eligible for both the tax concessions and for the full government contribution.
Government Contribution
Contributions may be made by the account holder themselves or another party (e.g. employer or parent) on behalf of the account holder. All contributions must be made from after-tax income (you cannot salary sacrifice into an FHSA). For each year, the government will contribute 17% of the first $5 000 (indexed) of individual contributions made by an account holder (or made on their behalf by an employer or parent etc). Therefore, if an account holder (and other parties contributing on their behalf) makes $3 500 of contributions for the 2008/2009 income year, the government contribution will be $595 ($3 500 x 17%). The maximum government contribution for the 2008/2009 income year is $850 (this maximum will increase in future years as the $5 000 limit is indexed). Any amount contributed by you (or on your behalf) above $5 000 (for the 2008/2009 income year) will not be eligible for the government contribution.
To be eligible for the government contribution in an income year, you as the account holder must:
- Be a resident for tax purposes for at least part of the income year; and
- Either lodge a tax return for the income year or notify the Tax Office (in the approved form) that you are not required to lodge a return for the income year.
In May 2009, Simon was sent to London for two months by his employer in order to perform work for a client (he had been in Australia for all of the earlier part of the income year). In April of that year, Simon established an FHSA and his parents, as a parting gift, contributed an amount of $6 000 in that same month. Even though not physically present in Australia, Simon would likely be regarded as a resident for tax purposes and would therefore (provided he lodged a tax return) be eligible for the government contribution. Simon would receive the maximum government contribution of $850 ($5 000 x 17%) even though the contribution was not made by him personally. The amount above $5 000 would not be eligible for the government contribution.
Tax Concessions
The following tax concessions apply to FHSAs:
- Contributions are tax-free;
- Withdrawals are tax-free;
- Interest on the contributions in the account is taxed at 15%; and
- Contributions and withdrawals (and account balances generally) are not assessable income and are not taken into account for income or assets tests for various government payments such as Centrelink or Family Tax Benefit.
Account Balance Limit
There is a limit of $75 000 (indexed) on the overall account balance. If you reach this limit, no further contributions can be made. Contributions exceeding the limit will be returned to the account holder.
Withdrawals
You are able to withdraw your account balance tax-free to purchase or build a dwelling (or an interest in a dwelling) in which to live. Upon doing so, the entire balance must be withdrawn and the account must be closed. Further, the entire= account balance must be used to purchase or build within six months of the withdrawal. To withdraw your funds, minimum contributions of $1 000 need to be made over the course of at least four separate financial years.
Alternatively, rather than purchase or build a dwelling, you can withdraw your account balance, close your account and contribute the entire amount to your superannuation fund at any time. Amounts can also be withdrawn in the following exceptional circumstances:
- You die;
- You reach the age of 60;
- You wish to transfer to another FHSA that you hold;
- To make payments under a family law obligation; or
- You are declared bankrupt.
Occupancy Rule
Having withdrawn your account balance and purchased or built your new dwelling, you must then use your dwelling as your main residence for a continuous period of at least six months over a 12 month period. This 12 month period commences at the time the interest in the dwelling is acquired or when, in the case of a new dwelling, construction is completed.
Example
Mitchell withdraws his entire account balance and purchases his first home on 1 April 2009. He must use that dwelling as his main residence continuously for at least six months in the period between 1 April 2009 and 1 April 2010.
Opening an FHSA
FHSAs can only be held with recognised account providers.
- Such bodies include:
- Banks;
- Building societies;
- Credit unions;
- Superannuation providers;
- Friendly societies; and
- Life insurers.
Increase in First Home Owner's Grant
Along with the advent FHSAs, the First Home Owner's Grant (FHOG) has been increased.
The FHOG was introduced by the Federal government on 1 July 2000 to offset the impact of the GST on the property market. The FHOG is separate from the FHSA, and all first home buyers are entitled to avail themselves of both schemes, subject to the respective eligibility criteria. Briefly, the principal difference between the schemes is that while an FHSA assists participants in saving for a new home, the FHOG is not savings-based but is rather a direct payment to those who are eligible. Until recently, the FHOG was a $7 000 payment to persons aged at least 18 who are Australian citizens or permanent residents and are buying or building their first home in Australia.
However, in early October 2008 as part of a $10.5 billion package designed to stimulate the Australian economy, the government announced that, effective 14 October 2008:
- First home buyers who purchase established homes will receive a grant of $14 000 (up from $7 000); and
- First home buyers who build a new home or purchase a newly-constructed home will receive $21 000.
The FHOG is administered by the various state revenue offices around Australia. For more information or to apply, you should contact the office in your state or speak at an adviser at International Professional Services.
Source: Australian Taxation Reporter January/February 2009
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