Australian Government, A Plan to Simplify Superannuation

First Home Saver Accounts - Consultation Paper

5. Government contribution and taxation treatment

This chapter describes the Government contribution to be paid to First Home Saver Accounts. It also outlines the taxation of individual and Government contributions made to First Home Saver Accounts and the earnings.

Key Points

  • The Government will pay a contribution to a First Home Saver Account where contributions are made to the account during the financial year and the individual lodges a tax return. For individuals who are not required to lodge an income tax return, separate administrative arrangements will be developed to facilitate payment.
  • The Government contribution will be applied to up to $5,000 of individual contributions made annually. It will be at least 15 per cent but range up to 30 per cent of contributions, depending on the individual’s marginal income tax rate.
  • Contributions made into First Home Saver Accounts will not be taxed.
  • Earnings on First Home Saver Accounts will be taxed at the statutory rate of 15 per cent rather than the individual’s marginal income tax rate.
  • Withdrawals to purchase a first home will not be taxed.

First Home Saver Accounts will provide a low tax savings environment similar to that applying to superannuation. They will provide a simple, tax effective way for Australians to save for the purchase of their first home through a combination of lower taxes and a Government contribution.

5.1 Government contribution

Savings of up to $5,000 per year (indexed) will be eligible for the Government contribution which will be paid directly into the account. It will be at least 15 per cent, increasing to 30 per cent depending on the marginal income tax rate of the account holder.

  • Where the individual does not pay tax or is subject to the 15 per cent marginal income tax rate, a minimum Government contribution of 15 per cent will be payable.

The Government contribution will directly increase the account balance and enable greater earnings to accrue.

5.1.1 Entitlement to the Government contribution

For an account to qualify for the Government contribution it must be provided by an authorised entity (as outlined in Chapter 2) and the account holder must have satisfied the eligibility requirements when they opened the account (as outlined in Chapter 3).

In addition, to qualify for the Government contribution, a contribution must have been made into the account during the financial year. The individual must also be eligible to have had an account when a contribution is made. No minimum individual contribution will be required (except to open the account).

5.1.2 Amount of the contribution

The Government contribution will be applied to up to $5,000 of individual contributions into an account in a financial year. The amount of the contribution will be based on an individual’s marginal income tax rate.

The calculation of the contribution is designed to provide a similar outcome to the salary sacrifice arrangements which were originally proposed. However, it will be simpler to administer and provide greater benefits to low-income earners, as individuals with a marginal income tax rate of zero or 15 per cent, who may not benefit from salary sacrifice, will be eligible to receive a Government contribution. For example, an individual with a taxable income of $25,000 in the 2008-09 year who made individual contributions of $5,000 would receive a Government contribution of $750.

The rates for the Government contribution will be as follows:

Government contribution percentage

Marginal income tax rate

Percentage contribution on up to $5,000 of contributions

0, 15 or 30%

15%

40%

25%*

45%

30%

* Based on 2008-09 tax scales.

For the 2008-09 financial year, the Government contribution payable into an account to which at least $5,000 has been contributed will be:

Maximum annual Government contribution

Taxable income range

Maximum benefit payable

$0–$80,000

$750

$80,001–$180,000

$1,250

$180,001+

$1,500

* Based on 2008-09 tax scales.

Where an individual’s taxable income exceeds a relevant rate threshold by less than the amount of the contribution on which the Government benefit is calculated, the benefit will be calculated by apportioning the amount of those contributions across the applicable rates. This will produce an outcome similar to that which would have resulted under salary sacrifice arrangements. For example, an individual with taxable income of $81,000 in the 2008-09 year who made contributions of $5,000 to an account would receive a Government contribution of $850, made up of 25 per cent on $1,000 (the amount by which taxable income exceeds the $80,000 tax threshold) and 15 per cent on the remaining $4,000.

5.1.3 Rounding of the contribution

The minimum Government contribution will be rounded up to $20 as long as the eligibility requirements are satisfied during the income year.

5.1.4 Payment of the contribution

The Government contribution will be administered by the ATO and paid directly into an individual’s account. It will not count towards the $10,000 annual individual contribution limit.

An individual will not need to apply for the Government contribution. The ATO will use individual contribution and account details provided by account providers, together with the income details from an individual’s income tax return, to assess and pay the Government contribution. Once this information is received, the ATO will pay the Government contribution as soon as practicable after the end of the financial year. These arrangements are designed to be consistent with the laws concerning the superannuation co-contribution.

For individuals who are not required to lodge an income tax return, the ATO will develop separate administrative arrangements to facilitate payment of the Government contribution.

Incorrect payment of the contribution

Where the Government contribution paid is less than the amount to which an individual is entitled (for example, where the individual’s income tax assessment is amended), the ATO will pay the additional amount directly into the account. Interest will be payable.

Where the Government contribution paid is more than the amount to which an individual is entitled, the ATO will be able to recover the amount overpaid. Interest will be payable to the Commissioner of Taxation.

Direct payment of the contribution

Where an individual no longer has an account, because they have already withdrawn the balance to purchase a first home, the Government contribution can be paid to the individual directly.

5.2 Taxation

5.2.1 Taxation of contributions

Individual contributions into an account will not be taxed as they will be made from post-tax income. The Government contribution will also not be taxed.

5.2.2 Taxation of earnings

Earnings accrued in an account will be included in the assessable income of the account provider and taxed at a statutory rate of 15 per cent (rather than an individual’s marginal income tax rate), taking into account deductions, tax offsets such as refundable imputation credits, or a capital gains tax discount. These taxation arrangements are consistent with those for earnings within a superannuation fund or retirement savings account.

For taxation purposes, First Home Saver Account activities will need to be segregated from the other activities of the account provider. Banks, building societies and credit unions will need to segregate First Home Saver Account activities from general banking business for taxation purposes. Similarly, life insurers will need to segregate their First Home Saver Account activities from their ordinary business. For Public-Offer Licensees, these will already be segregated, as the trust which operates the First Home Saver Account will be separate from any superannuation funds for which the licensee is trustee.

5.2.3 Taxation of withdrawals

Funds withdrawn from an account to purchase a first home will be tax free.

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Miscellaneous