With the ever increasing cost of property in Australia it’s becoming increasingly difficult for the younger generation to get a foot hold into the property market. This article outlines a strategy to help them save up for a deposit using their superannuation account.
This strategy works well in helping younger children because it avoids the punitive tax rates that are applied to kids under 18. Parents and Grandparents can use this to help their kids by setting up a regular contribution plan that will run for many years before being accessed for a home purchase.
The beauty of this strategy is its focused purpose: the money must be used to purchase a first home in Australia. The government will ensure that the money won’t be released for any other purpose. Once set up the grandparent can rest assured that the money won’t be used for anything else.
The first step is to open a super account for a child. The investment balance will be low to start so choose a low cost superfund with simple, set and forget investment options. There are no restrictions on opening superfund for children but you should check that your chosen superfund will allow it because not all providers will allow for child accounts. It’s also a good idea to get a tax file number for the child as the superfund may return any member contributions if a tax file number isn’t recorded against the account.
The next step is to start contributing into the fund. You gift money to the child who will then contribute to their superfund. The maximum that can be contributed is $15,000 a year to a total of $50,000. You can contribute up to $15,000 a year up to a total of $50,000.
When the child grows up and starts their first full time job they could consider salary sacrificing into the fund. This will help build the savings and also provide a tax deduction at the same time, as long as the $15,000 a year and total $50,000 cap isn’t breached the money can be withdrawn to purchase the first home. Note that the mandatory contributions that an employer makes, called Superannuation Guarantee (SG) Contribution are not eligible for withdrawal under this scheme.
Once set up the contributions and the deemed earnings can grow into a sizeable home deposit that can be accessed when it’s time to step into the property market. To get access to the funds the person withdrawing must request a FHSS determination from the Australian Taxation office.
As with all things superannuation it can get a little complex and there are risks to be aware of. I would recommend getting advice from an independent financial planner when setting up the plan and when accessing the funds to ensure it all goes smoothly.
This blog contains general and factual information and does not take into account anyone's individual objectives, financial situation, needs or tax circumstances. We strongly recommend you contact one of our Advisers if you would like personal advice.
Redpoint Investment Holdings Pty Ltd (trading as CY Financial Advice), is a corporate authorised representative (No. 378099) of CY Financial Services (AFSL No. 509648