The Government’s First Home Super Saver Scheme may push up house prices, reduce retirement savings and breach the sole purpose test and objective of superannuation.
The Government’s First Home Super Saver Scheme has been strongly criticised by the superannuation industry, in submissions in response to draft legislation.
The First Home Super Saver Scheme (FHSSS) was announced in the 2017 Federal Budget. It allows first home buyers to save using the super system. It is intended to apply to contributions from 1 July 2017, with withdrawals allowed from 1 July 2018. However the measure has yet to be legislated and may face resistance in the Parliament, with Labor already opposed.
FHSSS Breaches Sole Purpose Test and Objective of Superannuation
Several industry groups say that the FHSSS breaches the Sole Purpose Test set out in the SIS Act, and isn’t compatible with the objective for superannuation contained in the Superannuation (Objective) Bill 2016 – which has yet to pass the Parliament.
“Allowing withdrawals from super for other than retirement income, runs counter to the sole purpose test and the Government’s own objective of super,” said Industry Super Australia (ISA) chief economist Stephen Anthony.
“Contravening the sole purpose test has very serious consequences for fund trustees. In addition to the fund losing its concessional tax treatment, trustees could face civil and criminal penalties,” says the ISA submission.
“It is not clear how FHSSS oversight and administration within superannuation funds is consistent with sole purpose test of the SIS Act. The SIS Act will require modification to accommodate the FHSSS to deal with the restrictions imposed by the sole purpose test.”
“The sole purpose test and preservation arrangements are key components of the superannuation system and any changes should be undertaken with extreme care to avoid any unintended consequences.”
In their submission Chartered Accountants of Australia and New Zealand (CAANZ), which supports but has misgivings about the measure, says that the FHSSS is “currently not permitted by the existing wording of the Sole Purpose Test”. CAANZ recommends this is solved by legislative amendment.
The AIST submission says: “The FHSSS is not consistent with this objective, nor is it consistent with the Bill (currently before Parliament) which proposes to enshrine an objective of superannuation.”
FHSSS will push up house prices
Some submissions also say that the FHSSS, which is meant to be a housing affordability measure, will actually push up house prices.
“Incentives to encourage Australians to own their home, via tax breaks have often led to increasing house prices – a good example of this outcome is first home stamp duty concessions that state and territory governments have offered for many years,” says CAANZ.
ISA chief economist Stephen Anthony says that the FHSSS will likely drive up housing demand, leaving first home buyers with either increased debt or locked out of the housing market.
“Policy makers can target supply and demand in our major cities by reigning in investor tax concessions and boosting housing stock,” he said.
“Allowing individuals to dedicate voluntary super contributions towards a deposit for their first home will make no difference to housing affordability,’ says the ISA submission.
“Governments must address the supply of housing, not simply offer first home-owners another handout to further inflate prices via the superannuation system. Such piecemeal demand-side support to the housing market is counter-productive.”
The FPA warns that the FHSSS could encourage first home buyers to buy property at the height of the market.
“As evidenced with the first home-owner grants, incentives for housing usually push up house prices. Such schemes commonly result in a condensed influx of people being able to afford to buy with more money up front to spend on a house, driving more demand for properties and artificially inflating house prices to match the availability of funds. Housing markets then adjust accordingly to the influx of funds, further disadvantaging home buyers.”
“This ignores the cyclical nature of markets. Encouraging people to buy property at what may be the peak of the cycle in some cities will not grow wealth, rather it will only lead to an increase in household debt.”
AIST says: “We believes that the tax incentives in the super environment will assist people to save for a deposit faster, however we also note that the availability of more money for a deposit necessarily has the flow-on effects of access to more funds through borrowings, as well as increased comfort in paying more for property. This may not be consistent with the policy intention which is to assist with housing affordability.”
FHSSS could reduce retirement savings
The FHSSS could draw money from retirement savings because the withdrawals under the scheme are based on assumed earnings.
The FPA says: “In periods of volatility, negative earnings would reduce the balance, however the amount that could be released under the FHSS proposed legislation would still reflect the value of the initial contributions and positive deemed earnings. Therefore in periods of volatility, the amount withdrawn would be funded from those contributions plus the existing balance to make up the deemed earnings shortfall. This scheme provides a risk free return for housing deposits, at the expense and risk of the remaining superannuation balance.”
“This would result in the release of FHSS funds also taking funds contributed for the purposes of superannuation including the superannuation guarantee, in order to ensure the FHSS deemed earnings remained positive. The FHSS could have a significant impact on the remaining superannuation balance, particularly during periods of prolonged volatility such as the GFC.”
Industry Super Australia argues that guaranteeing returns – through a default calculation of income – would mean the FHSSS could “eat” into retirement savings.
“In times of low or negative returns, superannuation funds will be forced to dip into members’ super guarantee (SG) balances to cover the difference between guaranteed and actual returns. Its analysis shows that had the scheme been in operation over the last decade more than half of savers would have had their compulsory super assets eroded due to its design.”
“It’s also likely that SG assets will be used to underwrite returns in the first year – as any contributions will be deemed to have earned a full year of interest even if contributions are not made until the last day of the 2017-18 financial year.”
It is as yet unclear when legislation for the First Home Super Saver Scheme will be introduced to Parliament – potentially it may not be until 2018.