Legal way to save $15,000 in taxes

Legal way to save $15,000 in taxes

The huge rise in house prices in recent years has led to a decline in home ownership rates across the country, with 67 per cent of Aussies owning their own home, down from 70 per cent in 2006.

Getting into the real estate ladder is difficult.

At the same time, despite the current downturn in the real estate market, ownership is still one of the biggest drivers of true wealth. Even after accounting for the current fall in property prices, the value of all property in Australia has risen by over 47 per cent in the last five years alone.

Finding a way to get up the property ladder is valuable.

Given the challenges surrounding market entry, you need to gain every advantage. Fortunately, the government recognizes the difficulties involved in entering the real estate market and has taken some measures to help.

By using them to your advantage, you can buy your first home sooner and take one of the biggest steps to long-term financial security and true wealth.

Enter the first home super savings program

The First Home Super Saver Scheme (FHSS) allows you to save some (or all) of your real estate deposits through your super fund. Because you can contribute to Super with pre-tax money, FHSS can help you build your real estate portfolio faster.

The rules are a bit complex and there are a few risks that can catch you if not handled well. In this article, I’ll go over the key rules and how to use them to your advantage.

How the FHSS works

The FHSS was founded in 2017 to help first-time homebuyers climb the real estate ladder. The rules of the program allow you to make additional tax-deductible contributions of up to $50,000 per person into your Super Fund and then withdraw that money and the investment income generated in Super to buy your first home.

For couples, the benefit can be combined for up to $100,000 in super savings, giving you a solid down payment on your first home.

The contributions you can use for this are capped at a total of $50,000 or $15,000 per year. However, since the schedule is based on fiscal years, you can quickly take advantage of these rules if you plan wisely.

For example:

June 2023 (fiscal year FY23) – You contribute $15,000 to your super fund

July 2023 (fiscal year FY24) – You contribute an additional $15,000

July 2024 (fiscal year FY25) – You contribute an additional $15,000

Total contributions of $45,000, all made within 14 months.

This strategy can work well if you’re looking to buy your first home and have already saved your down payment. In this case, you can choose not to use the FHSS and make your deposit in the regular way. Or, with a little planning and preparation, you could take advantage of the program instead and save yourself $7,500 in taxes in the process.

You can also choose to build up your house deposits very slowly if it works with your strategy. For example, you could deposit $5,000 each year until your 20s, and by the time you are 30 you would have a total of $50,000 (plus your investment income) that you could withdraw to buy your first home.

If you make the contributions to your super under this scheme pre-tax, meaning you claim a tax deduction, they will be taxed in your super fund at a rate of 15 per cent. When you withdraw funds from your retirement savings, the money is taxed at your marginal tax rate, minus a 30 percent tax offset.

It gets a little complicated, but the stake is that you essentially save up to an extra 15 percent of every amount you contribute. Based on the FHSS cap of $50,000, that 15 percent tax saving equates to $7,500 (per person) — a decent chunk of change that can be a big help for someone just starting out in the real estate market.

What are the risks?

There are two main risks with this scheme. First, because the assumed rate of return is positive regardless of what actually happens to your investments, if your fund investments go down, you can withdraw more money than you invested. This can eat up your super savings and put you behind the curve.

The second major risk is especially for younger people as your income and marginal tax rate increase over time.

How the FHSS tax works:

– If you make contributions, you get a tax deduction at your marginal tax rate and your superfund pays taxes at the super-contribution tax rate of 15 percent, meaning the total benefit is your current marginal tax rate minus 15 percent.

– If there is a withdrawal from the fund, the withdrawal will be taxed at your current marginal tax rate with a 30 percent tax deduction.

If your marginal tax rate is the same at the time of your deposits and withdrawals, your total benefit is 15 percent. However, if your marginal tax rate is higher when you receive the funds, the benefit will be reduced. In fact, it can be lost altogether and you can be left behind.

Consider this example:

– Your marginal tax rate on contributions to the scheme is 19 percent, which means your contribution advantage (marginal tax rate – 15 percent) is 4 percent

– Your marginal tax rate when withdrawing under FHSS is 47 percent, which means the tax applied to the withdrawal (Marginal Tax Rate – 30 percent) is 17 percent

– The result is that you end up paying additionally 13 percent taxes on this money, based on total contributions of $50,000, this would be $6,500 extra VAT

You can see that it’s possible to wipe out the tax benefit and leave you with a tax bill on top of that. This can work in your favor when your tax rate is on the way down, but it’s more of the opposite with younger people, so you need to plan carefully.

On the other side of that risk, there’s also an opportunity if your tax rate is lower the year you retire under the program. This can work well for someone taking time off from the job market or working in reduced capacity such as a B. starting a family or starting a business.

I’ve unpacked an example of this in action here:

– Your marginal tax rate on contributions to the scheme is 47 percent, which means your contribution advantage (marginal tax rate – 15 percent) is 32 percent

– Your marginal tax rate when withdrawing under FHSS is 19 percent, which means the tax applied to the withdrawal (Marginal Tax Rate – 30 percent) is 0 percent

– The result is that you end up saving 32 percent in taxes on that money, based on total contributions of $50,000, that would be $16,000 in tax savings

There is a strategic opportunity to save significant taxes and build your real estate portfolio faster when the stars align with your strategy.

The case

The FHSS can help you build your real estate portfolio faster and save a lot on taxes in the process. But the rules are complicated and the strategy comes with risks that need to be managed.

Given that you’re talking about big numbers, both in terms of the real estate deposit you end up saving and the real estate purchase you then make, take the time to understand the rules and consider investing seek good professional advice to ensure the strategy actually works for you – the results will be worth your investment here.

Ben Nash is a financial expert, commentator, podcaster, financial advisor and founder of Pivot Wealth, host of the How to be Successful with Money podcast and author of the Amazon bestseller Get Unstuck.

Ben regularly hosts free online money education events to help you make better money decisions and progress faster. Here you can see all the details and book your place.

Disclaimer: The information contained in this article is general in nature and does not take into account your personal goals, financial situation, or needs. You should therefore consider whether the information is appropriate to your circumstances before acting on it and, if necessary, seek professional advice from a financial professional.

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