How does salary sacrifice work?
Need a little help saving for your first home? The First Home Super Saver (FHSS) is a little known saving scheme that can see you putting away money in a place with better interest than a bank. Your super fund.
Even though the Super Saver scheme has been an open option since 1 July 2017 when it was introduced by the Australian Government as part of the Federal Budget, it's not a saving plan or first home buyer incentive many people are talking about.
The big bonus is that the amount you allocate to your super won't be counted as your taxable income, this will help first home buyers save faster with the concessional tax treatment of super. Plus you can't access it to ‘accidentally' buy a new TV or go on holiday. It's more incentive to put money away and get the interest started.
It can be a good way for some people to save. I'm sharing the details over the next four blogs to hopefully give a few of the first homebuyers out there the leg up they need to get into their very own home.
This is blog #1 on the First Home Super Saver scheme, which goes over how salary sacrifice works and what research you need to cover before you get started. Please see the following blogs to read up on eligibility for the FHSS (blog 2), how to put money in and retrieve it again (blog 3) as well as professional advice you need to seek out to make an informed decision (blog 4).
What is Salary Sacrifice?
Salary sacrificing, also called salary packaging, is where you use your pre-tax income to pay extra money into your super or to pay for services like rent payments, childcare or your car payments.
Salary sacrificing is an arrangement between you and your employer so it is up to your employer to determine if this is a feasible option and what the terms might be. There are caps and limitations on how much you can allocate as salary sacrifice each year, as well as how much you can volunteer into your super without additional tax. With the case of FHSS funds, there are also limits to how much you can release.
While other services and payment options can be a little tricky to negotiate, most employers will offer salary sacrifice into superannuation to their employees.
Pre-tax wages that go into a superannuation fund for the purpose of buying your first home are taxed at a maximum rate of 15%, which is lower than most marginal tax rates.
Research you need to carry out
Check with your employer
Some companies do not permit salary sacrifice for their employees. There are a number of reasons why this may be the case and it's completely up to your employer to make this decision.
As well as whether salary sacrifice is possible and what the terms are, another thing you do want to check is how much superannuation you will be getting compared to your current amount. Your superannuation guarantee contributions are calculated at a minimum rate of 9.5%. With salary sacrifice you're your employer can choose to take that 9.5% from your taxed income only, not the gross income. So as you reduce your taxed income amount, you may be reducing your super contributions for your retirement.
It is up to your employer as to the terms and conditions and how this is managed. You may decide that your future retirement plan is more important than the benefits that salary sacrifice may bring.
Ask your employer if your super guarantee contribution will be based on your gross income. It's a smart move to get this information in writing to have if needed at a later date.
Check with your super fund
The Australian Tax Office (ATO) responsible for releasing the funds from your super account won't put any additional charges or fees on this service, however, your super fund provider may. Check with their terms and conditions or ask to talk to a representative about what the process is for FHSS release.
As well as understanding their stance of early release of funds for first home buyers, also check for any insurance implications and what the time frames are for the release of funds (usually it's 15-24 days).
As with your employer, it's a good idea to get anything they say in writing.
The last thing you want is confusion or complications from your super holder when you go to sign a contract to buy your first home.
While you are there be sure to update all your contact details so they have your current phone and address.
Check the federal government rules and regulations
There are limits to how much you can contribute to your super fund without penalty. Depending on what percentage or amount of your salary you allocate as voluntary contribution, you may reach or exceed the concessional contributions cap. If so, you'll most likely attract additional tax on the excess. A financial planner can help determine how much your ideal contribution will be and for how long.
Check your income
If you are already on a low-income, salary sacrifice might not be the best option for you. Salary sacrificing is usually more beneficial to those on mid to high incomes. You may want to consider getting financial advice before requesting or agreeing to a salary sacrifice arrangement.
If you have tax debt or student loan (e.g. HELP debt) these payments may be taken out of your FHSS funds before they are released to you. Talk to your financial advisor if you have debts to see how this will affect your end payment and also to make sure you have enough taxable income remaining to cover your debt repayments while you save.
Check your eligibility.
My next FHSS blog covers Who Is Eligible and what terms and conditions you need to take into account. Before you make a financial commitment.