The Rudd Government looks set to deliver on at least one of its election promises, following the end of public consultation on its First Home Saver Accounts. According to Treasurer Wayne Swan, changes since the election will make sure the accounts benefit more recipients and will mean the system is less complicated. So what will the First Home Saver Accounts involve?
First Home Saver Accounts will reflect current superannuation arrangements. A minimum $1,000 contribution will be required to open an account. A tax rate of 15 % will apply to the first $5000 deposited in the account each year. Interest earned will also be taxed at 15%.
Eligibility will be based around criteria used by the States and Territories to assess eligibility for the First Home Owner Grant. Unlike the First Home Owner Grant, eligibility to open an account will be determined on an individual basis and will not be affected by the eligibility of an individual's partner.
The Government will co-contribute between 15% and 30% of account holder contributions, depending on the account holder's marginal income tax rate. The account holder may deposit an additional $5,000 a year from after tax income without paying any further tax on that contribution.
Contributions to an account will be limited to $10,000 per annum, excluding the Government contribution and interest earned. The Government has committed to a cap on overall account size, but as yet it is unclear whether it will maintain the proposed $50,000 limit.
To make a withdrawal, account holders must have contributed at least $1,000 in each of at least four years. Withdrawals will be permitted for the purposes of purchasing or building a first home to live in, at which point the full amount will need to be withdrawn and the account closed. The funds need to be withdrawn before the sale or contract to build a first home is finalised. The full amount may also be withdrawn and contributed to superannuation, at which point the account must be closed.
Over the next four years, the Government has committed $850 million funding for the Government contribution and $100 million for the concessional tax treatment of earnings. The Government has indicated it will consider Treasury modelling which will ensure, among other things, that the accounts are adequately funded.
On top of its funding guarantee, the Government has claimed that the accounts will be easy to use. For example, Government co-contributions will be paid directly into the accounts and by transferring their account balance into superannuation, individuals may apply to their superannuation fund to access their funds using the superannuation early release provisions of severe financial hardship, compassionate grounds or terminal illness.
In particular, the Government has claimed that the accounts will provide help for low and middle-income earners. Account balances will be exempt from the social security assets test and the minimum 15% co-contribution, which applies regardless of an individual's marginal tax rate.
However the accounts may cause problems for some account holders. For example, despite being promoted as a "superannuation-style" system, the Government has already stated that "it would be difficult" to implement salary sacrifice arrangements by the second half of 2008. This means account holders may not receive the immediate benefits of concessional tax rates.
Despite some apparent obstacles, enabling legislation is likely to be introduced sooner rather than later, with house prices continuing to soar and more interest rates pain predicted to follow the Reserve Bank’s March meeting. The coalition is likely to support a Government Bill, after the Howard Government pledged a similar scheme as part of its election campaign.