First Home Savers Account (FHSA)

This tax effective structure was originally introduced in the pre-election promises made by the Labour Government. It now forms part of the Federal Budget 2008 announcements.
We thought it would be a useful to keep you informed as to the information we have at hand. There may well be some further improvements or clarifications made before its intended launch date of 1 October 2008.
To be eligible to open a FHSA a person must:

  • Be aged at least 18 and under age 65;
  • Never have purchased or built a first home in Australia in which to live;
  • Not hold or not have held an FHSA previously.

No minimum initial or annual contribution applies, although product providers may set their own limits.

Some of the rules include:

  • The Government contribution will be 17% and will apply only to the first $5,000 contributed each year;
  • Personal contributions will be able to be made to the account until the balance reaches $75,000 (including Government contributions). No further contributions once the balance exceeds $75,000;
  • Earnings on the account will be taxed at 15%;
  • Withdrawals:
    –  from the account will be tax-free if it used to purchase or build a first home in which to live, and if at least $1,000 have been contributed to this account for at least 4 consecutive financial years.
    –  from age 60 can be for any purpose.
    –  prior to age 60 can be rolled over into a superannuation fund (treated as a Non Concessional Contribution) if not used to purchase or build a first home in which to live.

Benefits are as follows:

  • Contributions can be made by the account holder or any other person;
  • All contributions will be treated as post-tax amounts and will not be taxed in the account;
  • Earnings on the account will be taxed at 15%, consistent with Super fund rules;
  • Government contribution will be 17% and will apply only to the first $5,000 contributed each year ie a maximum Government contribution of $850 pa;
  • Withdrawals from the account to purchase a first home will be tax-free.

Strategy considerations

If you have young children aged 18 years and over (who have not purchased or built a first home in Australia in which to live), you may wish to open a FHSA on their behalf or encourage them to open and contribute to a FHSA. The returns below make it attractive and justifiable.

Examples

The tables below compare the end benefits of investing $5,000 pa and $10,000 pa in a FHSA and a Savings account, for a client earning $70,000 pa (ie 31.5% marginal tax rate), a client earning $90,000 pa (ie 41.5% marginal tax rate) and a client earning $200,000 pa (ie 46.5% marginal tax rate).

Contributions of $5,000 pa

 

 

Years

 

  

1

 

  

2

 

  

3

 

  

4

 

  

5

 
 

FHSA

 

  

$6,150

 

  

$12,668

 

  

$19,577

 

  

$26,899

 

  

$34,661

 
 

After-Tax Return

 

  

23%

 

  

14%

 

  

11%

 

  

9%

 

  

9%

 
 

Savings Account (31.5% tax rate)

 

  

$5,241

 

  

$10,736

 

  

$16,496

 

  

$22,534

 

  

$28,864

 
 

After-Tax Return

 

  

4.8%

 

  

4.8%

 

  

4.8%

 

  

4.8%

 

  

4.8%

 
 

Savings Account (41.5% tax rate)

 

  

$5,206

 

  

$10,627

 

  

$16,272

 

  

$22,149

 

  

$28,269

 
 

After-Tax Return

 

  

4.1%

 

  

4.1%

 

  

4.1%

 

  

4.1%

 

  

4.1%

 
 

Savings Account (46.5% tax rate)

 

  

$5,189

 

  

$10,573

 

  

$16,160

 

  

$21,958

 

  

$27,975

 
 

After-Tax Return

 

  

3.8%

 

  

3.8%

 

  

3.8%

 

  

3.8%

 

  

3.8%

 

Assumptions:
Annual contribution of $5,000. The announced FHSA attracts a Government contribution of 17% of the first $5,000 contributed per year. Interest rate is 7.05% in both examples. Rates are assumed to remain constant over the investment period. All figures are after income tax (at 15% for FHSA and 31.5%, 41.5% and 46.5% for the savings account). Contributions made annually in advance.

 

Contributions of $10,000 pa

 

 

Years

 

  

1

 

  

2

 

  

3

 

  

4

 

  

5

 
 

FHSA

 

  

$11,449

 

  

$23,585

 

  

$36,447

 

  

$50,080

 

  

$64,531

 
 

After-Tax Return

 

  

14%

 

  

10%

 

  

9%

 

  

8%

 

  

7%

 
 

Savings Account (31.5% tax rate)

 

  

$10,483

 

  

$21,472

 

  

$32,992

 

  

$45,068

 

  

$57,728

 
 

After-Tax Return

 

  

4.8%

 

  

4.8%

 

  

4.8%

 

  

4.8%

 

  

4.8%

 
 

Savings Account (41.5% tax rate)

 

  

$10,412

 

  

$21,254

 

  

$32,543

 

  

$44,298

 

  

$56,537

 
 

After-Tax Return

 

  

4.1%

 

  

4.1%

 

  

4.1%

 

  

4.1%

 

  

4.1%

 
 

Savings Account (46.5% tax rate)

 

  

$10,377

 

  

$21,146

 

  

$32,320

 

  

$43,917

 

  

$55,950

 
 

After-Tax Return

 

  

3.8%

 

  

3.8%

 

  

3.8%

 

  

3.8%

 

  

3.8%

 

 

Assumptions:
Annual contribution of $10,000. The announced FHSA attracts a Government contribution of 17% of the first $5,000 contributed per year. Interest rate is 7.05% in both examples. Rates are assumed to remain constant over the investment period. All figures are after income tax (at 15% for FHSA and 31.5%, 41.5% and 46.5% for the savings account). Contributions made annually in advance.