Posted on 28/11/2023
Kim: Good day. I’m Kim Bigg, and welcome to our podcast tailored for small and medium business owners who want to understand more about accounting and tax in Australia. Please note, the insights and tips we share in this podcast are general in nature and are not designed to replace personalized advice. Your financial situation is unique. So it’s essential to weigh the information we discuss against your specific goals, current financial status, and individual needs. Seeking professional advice is always your best bet for making informed decisions that align with your personal circumstances.
Hi, everyone. I’m Kim Bigg, and welcome to episode three of our podcast, Show Me The Perks. A series tailored for small and medium businesses and their owners in which we offer practical insights around the big accounting and tax matters in Australia.
We are recording this episode on the ninth of November 2023.
Like to introduce our guest today, Sam Wagner, who is a Director of Perks Accountants & Wealth Advisers, and works in our business services division.
Sam, can you please give us a bit of insight into your current role at Perks and also some information on your previous roles to Perks?
Sam: Thanks for having me, Kim. So like yourself, I’m a Director in the Business Services team.
So do a lot of work with small medium business owners as well as quite a bit with some individuals, which is probably why I’m here today. This topic’s very relevant to some of our individual clients. I’ve been here at Perks since January 2007. So I started out as an undergrad while I was still at university.
Kim: Undergrad being a junior accountant for the non-accountants in the room?
Sam: Yeah. So I didn’t have any experience or knowledge. And yeah, because of that, I guess, I haven’t really had too many related previous roles, this has been my first and last role in the accounting profession.
Kim: You do have one other role, which is the MC at the Perks end of financial year show each year. So, obviously, an illustrious role that you take on each year.
Sam: Yeah, it is. It’s a bit of fun obviously, we all work very hard here at Perks and it’s a good release for a lot of people on that day and it’s very enjoyable to be, in control of it, it sort of means I can’t get called out too often, which is great.
Kim: Self-appointed as I understand. In today’s episode, we will be discussing first home super saver scheme, and Sam, I’ll get you to run through it. So this is something that’s close to your heart. Suppose it’s a good way to put it, but certainly something you’ve had a lot of discussions with several of your clients about. I’m interested to hear a little bit more about first home super saver scheme. So first, if you can give us a little summary of what it’s all about, and then I’ll jump into some questions and things as well.
Sam: Yeah, sure. So this game, I’ve sort of had a close look at it as I mentioned before. I act for quite a lot of individual clients, and there’s probably some business owners sitting there going how’s this relevance to me. And we’ll certainly get to that because there are some ways that in, you know, your normal run of the mill family group, there would be the ability for this to be relevant.
So going back a few years, obviously, housing affordability been a hot topic, a hot political issue, lots of rumblings around, you know, whether the superannuation scheme systems should be used to help out younger Australians break into the property market.
Kim: And it’s certainly very hard for younger Australians to get in at the moment.
Sam: Yeah, and I guess at the time this was launched probably two or three years ago, you know, we had historic low interest rates. So people are putting their hard earned pennies in the bank weren’t really seeing any return on that and, so the government’s brought in this scheme effectively allowing taxpayers to use superannuation scheme to save towards their first home.
Kim: So it’s a tax effective way of saving money for your first home. Is that right?
Sam: Yeah, correct. So in summary, you know, if your taxpayer’s going to make a voluntary contribution into Super, at a future point in time, that contribution will be available to reach and use towards the first time deposit.
Kim: Very good. Now there’s probably a few more items to go through just to expand it a little bit better. So do you mind just taking us a little bit through some of the specifics in terms of who this scheme is really targeted at, in terms of, I believe it’s any age. But generally speaking, give us an illustration of who you think this would be most appropriate for or which individuals in Australia would be or should be thinking about this.
Sam: Yeah. So the basic eligibility criteria is no age limits. You do need to be over 18 if you want to make a withdrawal from a super farmed under this game.
Kim: So you need to be over 18.
Sam: Yeah. Need to be 18 to be able to pull it out. Don’t need to be 18 to be able to start making contributions in.
Kim: Lines up with the fact that if you’re buying a house, I think you need to be 18 to buy a house anyway, don’t you?
Sam: I’m not sure on that, but I doubt a bank would be lending to you if you’re under eighteen. So you also never can have owned a home, but if you have spouse and they’ve owned a home that doesn’t preclude you from using this scheme. And you can only use this scheme once, so you obviously can’t use it repeatedly.
Kim: It needs to be for a home, or can you do it for any investment property?
Sam: So you need to be intending to move into it.
Kim: So doesn’t need to be your home.
Sam: Yeah. But it can be it can be a vacant block with the intent to build.
Kim: So you can’t just have your spouse having purchased the home, and then you going through and just buying an investment property and accessing this, that’s not what this is all about.
Sam: No. That’s not what it’s designed for. Yeah. So once you’re eligible in terms of how it works, you would need to be making eligible contributions. So, most people, anyone now that’s working in Australia and getting paid a wage would be receiving super guarantee contributions from their employer. Those amounts aren’t ineligible for withdrawals. So, they still need to be there, you know, they’re ultimately there to provide retirement benefits. We don’t get access to those. This is only relating to voluntary contributions.
Kim: So, if you pull this down to the individuals’ level, and if you like, you know, this is a podcast aimed at small business and their owners and what opportunities are for them on a I guess the way the government brought this in initially was really on a very individual level to try to help. Let’s call it the 22-year-old who’s trying to save for a house. They’ve got a wage salary and wage earner.
They might be saving a thousand dollars a week. Let’s say if they’re doing really well, they’ll be saving five hundred dollars a week might be a better number. So they might be saving $26,000 a year for argument’s sake. And but under the old system, or if you use the basic system, they’d just put $26,000 in a bank account, in a savings account, and just hope to get as good a return as they can off of it.
Pay some tax on the interest they’re earning on the $26,000 and hope that after a while, they’ve saved up enough to be able to go and buy a home. If you sort of parlay that into this example. If you are the, let’s leave the, you know, small business owners out of it for the moment, if you’re an individual and you trying to use this in your own right. And instead of putting that $26,000 into your savings account, what’s this system asking you to do?
Sam: Yeah. So it’s effectively asking you to contribute it into your superannuation fund. And that’s obviously ss a voluntary contribution.
So going straight to your example, we with $26,000, one of the critical factors around this is there’s a limit of $15,000 per year of voluntary contributions per individual and up to a lifetime limit of $50,000. So back to your example, that person, they’ve got it sitting in a term deposit. If they’re going to enter the scheme, they’d go and choose their amount, make a voluntary contribution into their fund, depending on how much money they’re earning outside of Super, what they’re on
Kim: If they’re saving $500 a week, you’d think you know, that sounds a guess. They’re on $150,000, maybe. Not sure.
Sam: Yeah. So at that level, they’d, they’d be they’d be looking to claim a deduction. For that contribution. So, obviously, they’d be sitting there at a $150,000. They’re sitting in the 39% tax rate, so they get a bit of a benefit outside when those proceeds are received on their super fund, their super fund pays fifteen percent tax, so a bit of a benefit there.
Sam: There’s a bit more that gets invested. And then that, I guess, there’s a few other benefits of having it in Super. So, you know, as you say, if you’re if you’re trying to, you know, the median house price in Adelaide, as we speak, about $700,000.
So you have 20% percent deposit plus cost you’re looking at a $175,000 of savings, which is going to take quite a while I guess if it’s in your suite, but one of the advantages is you can’t give up and go and reallocate your house deposit to a trip to Europe.
Kim: So using this as an example with this twenty six thousand for argument’s sake, let’s say and you mentioned before there’s a fifteen thousand dollar annual limit. So let’s say you said person can save twenty six thousand a year for let’s call it three years. So they’re really going to put in let’s call it fifteen grand into this super home saver scheme.
Yeah. And then the other eleven grand, they’ll just pack into their normal everyday savings account like they would have done anyway. So at the end of three years, in theory, they’ll have forty five thousand that’s been punched into this super scheme account. And then they’ll have the other thirty-three thousand in their savings account.
That’s sort of the contrast of the two, different options. Yep. And then they’ll and then presumably at the end of, well, let’s call it, at the end of three years, four years, five years down the track, they’ve saved up enough, and they’re going to go and buy that seven hundred thousand dollar median house. Yep.
With their savings, they’re essentially going to try to scoop up their savings. They’ve got in their own super account as well as this chunk of money of voluntary super contributions that’s sitting in the super home saver scheme account. Is that what it’s called?
Sam: Yeah. So the so the process is effectively before you sign a contract. So Importantly, if you go into an auction and you’re a live chance of bidding, you need to do this process. First, you you request what’s called a determination from your super fund. And they’ll tell you exactly how much you’re able to withdraw.
Yep. And then once you’ve signed a contract, you go and notify them. You actually want to withdraw those funds, and they’ll pay them out year and you can use that.
Kim: And essentially, the money that’s been in the super saver scheme, it gets taxed at fifteen percent normal everyday superannuation rates.
Yes. Contrasted against that person’s thirty nine percent tax rate if they tried to save it in their own name. Correct. They’re eating I don’t know, five grand of interest every year and they’re getting thirty nine percent of that taken away from them and handed over to the government makes it hard to save, whereas this is a way of saying, well, only getting taxed fifteen percent, you’re going to have a higher number sitting there at the end when you’re ready to buy your home.
That’s the that’s the tax effectiveness of this, isn’t?
Kim: Correct. And I guess one of the more obscure things about the scheme is the amount available for withdrawal doesn’t actually depend on the actual performance of the funds in superannuation. So when you request a determination, they’ll prepare a calculation based on what you’ve put in, less any tax super funds had to pay, but the earnings that they apply is based on what we call the shortfall interest rate, which is the ninety day bank accepted bill rate plus three percent. So, in the current quarter, that’s sitting at seven-point one five percent.
So the individual’s going to be able to pull that out and he’s sort of almost guaranteed that return irrespective of how the actual underlying funds have performed.
Kim: And to put that into perspective, Using a really simple example, that one we were talking about before, if you had three years of fifteen thousand, you’ve put in forty five thousand, or it said individual has put in forty five thousand, Even if you we go through a GFC event over the next three years and your super fund’s been absolutely hammered, the individual will still go back and ask for it they should really get forty five grand plus, you know, whatever that ninety day bank accepted bill rate interest is.
So, you know, if it’s over three years, it might be in the mid fifties or something like that, and they’ll get out. It’s not as if, you know, they’re going to come to try to get it and, oh, wow. I’ve only got thirty six thousand left that I can draw from it.
Sam: Yeah. Obviously, that only works if your overall fund account balance is still positive.
Kim: This person’s still putting in super guarantee amounts. So you think that know, they’re still going to be overall positive out.
Sam: Correct. Yeah Correct.
Very good. And now, if there’s any other items you wanted to raise in there, I was going to jump in fictional character example to take us through and illustrate this in more detail.
So received a bit of feedback over the last couple of weeks that some of my previous fictional characters, the millennials have no idea who it is. So I’m going to try to use a more up to date character this week, which may or may not work because it depends whether people have Foxtail subscription or not, I think. So I’m going to choose Logan Roy from Succession. If anyone’s seen that on Foxtel.
So Logan is a very wealthy man. If you ask me, the program is based on Rupert Murdoch. So that’ll give you some impression. That he’s a wealthy person.
And he has four adult kids, and I’m going to run through the options of let’s say for a minute, Logan wants to do this first home super saver scheme with his own kids and what might happen. So I’ll throw these questions to Sam So first question is, let’s imagine we are Logan Roy, and we are clearly a wealthy man, and he has adult aged kids, and he wants give his kids a bit of a hand to save and buy for their first home. He wants to do a tax effectively, and he wants to know that when he gives them the money in cash, Given that they are susceptible to spending it rather than saving it, how can the first home super saver scheme help Logan?
Sam: Yeah. So I guess in terms of protecting his kids from their own own spending habits. Once it goes in, can only come out, you know, to buy your first home. So if you once you do get the funds out, you’ve got twelve months to put it towards an eligible purchase, there is the ability to extend that by for the twelve months.
But then if you haven’t found a house within twenty four months, it has to go back into the fund.
Kim: These blokes are probably not looking for the seven hundred thousand dollar house either. So if they’re going to go and buy a one point five million dollar house, does that still work?
Yep. No. There’s no no limits on the on the property. So, yeah. So I guess just having it there in in Super and not not being available for every day spanning items would sort of help log and, you know, protect these kids from And feel comfortable with that.
When he gives them the forty five grand, then it, you know, it feels like it’s going to go to them and be locked away and they can’t blow it on, you know, whatever personal devices they use to, pass the time. So Yeah. Okay. Second question, let’s imagine Logan Roy being an Australian.
He probably has a discretionary trust, which he controls, and he earns income from his business. Which comes into his said discretionary trust.
Let’s call it Waystar Royco, as is in the succession episodes, How might he use the discretionary trust to his advantage with regards to making these tax effective contributions to Super for their first time Super save a scheme for his kids.
Sam: Yeah. So I guess to the extent that the the cash has originated in that discretionary trust as as trustee, he could make a a distribution taxable income out to all or any of these children that could then be followed by the cash. If they then contributed into super, they they sort of end up with a net nil tax result.
They’ve received a taxable income, but they’re entitled to the deduction. And that effectively means the tax rate on that income from the discretionary trust is is that fifteen percent. It’s a pretty tax effective way of dealing with business income.
Kim: So it’s also we first started this episode talking about how it’s tax effective for the individual Saver and for the individual in question, which is probably more where the government was focused on when they created this scheme.
But it’s fair to say that if you have a small medium business owners, which is what this podcast tends to aim at, there’s ways in which you can use this scheme to have dual effect for mums and dads. They can assist their kids to tax effectively saved by home, but they can also minimize their own tax mobility to some extent if they have a discretionary trust and they have some capability there.
Sam: Yeah. Absolutely. Especially, you know, if the alternative is just the distribution goes out to mum and dad. they pay the tax and then gift.
Kim: Pay the tax at forty percent and then gift it to their kids and they put it in that doesn’t make a lot of sense. If you’ve got the discretionary trust, there’s a lot of flexibility there. So final question, although there’s a few different parts.
So I’m just going to run through the different options here, and I’m going to pose a few scenarios as to what Logan’s kids actually do with the money. So, let’s imagine Kendall is the sensible person. He’s this is five years from now. And he’s now ready to buy a house.
He wants to use the savings that’s in there that his dad essentially put in, Logan, put into his account and he wants to go and buy a house. So, we talked a little bit about it before, but what does what does Kendall do? What what’s the practical method of what he actually has to do.
Sam: Yeah. So it’s as simple as requesting a determination from your fund. Yeah. From your super fund.
They’ll do a calculation. Say, yeah, Kendall, you’re entitled to pull this out. Let us know when once you’ve once you’ve signed a contract.
Kim: And then once he has to use it for his house.
Sam: Has to use it for his house. So And then once he signed a contract, he requests the actual funds. And from the clients I’ve seen use it, it’s generally out sort of within a week or two. So very accessible.
Kim: So dad doesn’t have to worry about him hoiking it out and using it, you know, down at the pub on the weekend. It’s it’s mandated that it has to go towards his house.
Sam: Yeah. Correct.
Kim: So I’m going to choose the next person. So Roman is not so sensible as people may have picked up in the succession episodes. He has no idea what he’s doing. He’s completely focused on trying to get his hands on the money, and he wants to use it to buy a boat.What does Roman, what’s he going to come up against?
Sam: Yeah. So look, if let’s say Roman did get a withdrawal of his fund on the basis he was going to buy a house and then and then didn’t. Effectively, he would either need to reconfigure the same amount, so maybe he’s going to have to go on set sell his boat or come up with the funds somehow else and re contribute it back in.
Kim: So it gets tracked later on.
Sam: Yeah. Or he would have to play pay a flat rate of tax of twenty percent. I haven’t seen anything on how this is police, but we know there’s lots of data matching between the ATO and land titles offices. So, it wouldn’t surprise me if they’ve got a way to check.
Kim: Third option, Shift, the daughter, She’s also sensible, but she forgot it was even there. So let’s imagine you, shiv, and she just completely forgot that her dad even put this money in there. And she went and bought a house by herself. Forget all about it. Just did it because she just did. I forgot it was there.
So what happens to it now? So she’s had this forty five grand that got voluntarily put in. Yeah. You know, she’s now bought a house, so she’s no longer a, non home owner.
Sam: So, unfortunately, or, unfortunately, however you look at it, for shifts, she’s no longer eligible to to make a withdrawal. So, yeah, as we’ve said back at the start, one of the basic eligibility criteria was you’d never owned a home. So, once she owns a home, she’s no longer eligible to pull these funds out.
Kim: She doesn’t does not lose it?
Sam: Not lose. So it’s still her money and it’s in her superannuation fund. She’s just going to be bound by all the normal conditions of release.
Kim: essentially going to have to wait until she’s sixty five to get a hold of it.
Sam: Yeah. Correct.
Kim: Which, if you’re Logan, the dad, and you’re thinking, well, she forgot about it, Now she has to wait until she’s sixty five to get out of the money, you’re probably not too upset because at least she hasn’t, you know, done what Roman didn’t blow it on a boat. She’s managed to at least retain it and save it for her own retirement. So not such a bad outcome or renewal.
And the last person who I’m going to run through with Connor, so again, there’s a bit of a theme here. Connor has no idea what he’s doing either. He will probably forget it’s even there forever and have completely no idea. How do we make sure, you know, if you’re Connor or if you’re Logan and you’re worried about Connor who absolutely has no idea what’s going on, What if he completely forgets about it and never even knows that it’s there?
And as and, you know, this is ten, fifteen, thirty years down the track. What what’s the, Hopefully, Connor still gets some benefit at some point this thing.
Sam: Yeah. Well, well, I guess probably the same as Shiv, if you never access is that it’s still in his name and it’s going to be there for his retirement benefits.
Question, if he’s that useless whether he would actually ever be able to even to the housing market anyway.
Kim: He may not make it to a sixty five.
Sam: He might not make it there. But, yeah, ultimately, the tracking of the automate is still with the with the super fund.
So they’ve got their systems there to make sure that at any point, if they if they get a request for a determination, they can calculate it. So yeah. Look, if it’s not a priority for Connor, it doesn’t really matter at the end of the day. He’s still, going to benefit from those funds ultimately.
Kim: Excellent. Very good. Thank you, Sam. Now I was just going to summarize if you can, the key takeouts from this.
So I just want to So this is probably on the individual level and also on the, if you are a small and medium business owner, trying to summarize the benefits that are available to, from a tax perspective.
Sam: Yeah. So part of the key thing from a tax perspective is that the the benefit has to the contribution comes from from the tax buyer that’s going to buy the house. So if that’s an adult child, it’s going to very much depend on what their what their marginal tax rate is.
So if they’re currently, for example, uni or not studying, not earning any money, then the tax savings on the way through are probably going to be relatively minimal. But this is good for those that might have children that have just entered the workforce, you know, staring down the barrel of a deposit that’s more than their annual income and just not standing how they’re going to get there. Yeah. But sort of starting to pay tax and, you know, interest rates going up, they went up again on Tuesday.
Kim: Trying to buy a house. It’s seven times their annual earnings.
Sam: Yeah. It’s it’s just it’s only going to get harder.
So really, yeah, the marginal tax rate of the individual question is relevant and sort of the higher the more beneficial this is.
Kim: It’s just a good way of getting a bit of a leg up to get the savings up. Yeah. As easily as they can.
Sam: So that’s probably the main tax one that I think the protection of the funds from the individual in question is probably a more common issue than maybe it should be, but we do see popping up in our client base where parents really want to help kids, but, you know, don’t like the feeling of just handing over a cheque that that may or may not end up, being used for proper purposes. So that’s really helpful. And I guess when the system first came in, there were lots of questions about how user friendly it would be, but all the examples I’ve seen, it is quite actually easy to administratively get your cash at the end, which is really important because you’re buying your first house a pretty big deal.
And you sign a thirty day contract, you don’t want to be sweating that your funds are actually going to going to land, and I haven’t heard any any negatives outcomes of that. So
Kim And that’s really the key from the, small to medium business owners. And, you know, in the in Australia is really just, you know, quite often, they want to help their kids, but they’re they’re a little bit nervous about making sure the money gets used right, you know, it’s a great way of being able to do it in a tax effective way and also make sure know, it goes where they want it to go, which is to help them, you know, get a home, get into the property market.
Very good. Right. I’ll switch onto the part of the episode. So this is onto questions once again. We don’t have any specific questions, but now that we’re a couple of episodes in or three episodes in, where you have A little bit of feedback from a few people who’ve listened to the podcast so far. So rather than a question per se, I’ll just go through a little bit of this feedback very briefly before we finish off. So you might remember Simon Wotherspoon was the guest last week. He was concerned that I didn’t get one of his jokes and didn’t laugh at it.
Thank you Simon for the feedback. Neil Oakes gave a bit of feedback that he thought the intro music was showing me the tax. It is not show me the tax. I don’t know why we would have an episode talking about showing me the tax.
We are trying to avoid tax if we can. Not get more tax. It says Show Me The Perks Neil. Thank you.
Bruce, wanted one of the fictional character to be something to do with Arsenal. Thanks, Bruce. There is an anonymous millennial who does not know who the trading post is. Or what the trading post is.
And I should add I mentioned that Wayne was doing the trading post in that episode. It was not. It was Anthony in the castle.
Movie, and that is the conclusion of the feedback so far. So all positive as you can tell. Any other comments on that Sam? No.
Sam: It’s just great to see, I guess, all the, all the listeners out there supporting you and directing you were required.
Kim Robust feedback. That’s what we want. Okay.
That is all I have for today. So hopefully everyone found that very informative and something that may well affect them personally that might be able to use in their everyday lives. And if they have any questions, we’re more than happy at Perks to consider those and talk people through what their options may be. Thanks again to Sam for coming along for episode number three.
We look forward to next episode. Episode four in weeks’ time and confirm who that guest is next week. Thank you. I’m Kim Bigg and stay Perky.
The information provided in this presentation is general in nature and is not personal financial product advice. The advice has been prepared without taking your personal objectives, financial situation or needs into account. Before acting on this general advice, consider the appropriateness of it having regard to your personal objectives, financial situation and needs. You should obtain and read any relevant Product Disclosure Statement (PDS) before making any decision to acquire any financial product referred to in this presentation. Please refer to our FSG (available at https://www.perks.com.au/perks-ppw-fsg/) for contact information and information about remuneration and associations with product issuers.
Kim Bigg is a Director at Perks and a qualified Chartered Accountant. With more than 20 years’ experience as a business adviser, Kim is highly adept at assisting growing and established businesses across a wide range of industries.
Sam has assisted many pharmacy and medical clients in the key areas of tax compliance, business valuations and restructures, business transactions and transitioning their financial affairs to the cloud.