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Unravelled: Can super really help housing affordability (and I have not asked should it)?

7 June 2017

Written by Partner Michelle Levy

The 2017 Budget included proposals intended to 'reduce pressure on housing affordability'. Two of them use the superannuation system to do so. First there is the 'First Home Super Saver Scheme' that will (according to Treasurer Scott Morrison) 'help Australians boost their savings for their first home by allowing them to build their deposit inside superannuation'. Then, for those with homes, there is some encouragement for 'older people to downsize from homes that no longer meet their needs and free up larger homes for younger, growing families'. This proposal is called 'Reducing Barriers to Downsizing'.

There is very little detail provided on either proposal, although they are both meant to commence on 1 July 2017.

First Home Super Saver Scheme

The First Home Super Saver Scheme has some similarities to the First Home Saver Account and, there is a risk that, it might share the same fate. There is also a risk that it is going to be much harder to administer and explain than the proposal suggests (and perhaps deserves). The Treasury fact sheet says that from 1 July 2017 a person can make voluntary contributions of up to $15,000 a year and $30,000 in total to superannuation to purchase a first home. Many people have already observed that this provides for a pretty small deposit, but that is not its chief defect.

The scheme will be administered by the tax office and, when a person has made their voluntary contributions and wants to buy a house, they will notify the tax office. The tax office will then direct the trustee to pay an amount from the fund. Trustees will have to release the amount notified to them by the tax office. They cannot decide not to participate in the scheme or offer it to their members. Some trustees have expressed concerns about the effect on their investment strategies and liquidity needs. And there are other concerns.

As to what can be withdrawn – well, that is slightly confusing. The proposal assumes that a person will make voluntary concessional contributions and that they will be able to withdraw those contributions, less contributions tax, plus an amount for deemed earnings from the fund. The deemed earnings rate is the 90 day bank bill rate plus 3% which may exceed the actual investment return on those contributions and deplete their retirement savings. There is also nothing about how members withdrawing benefits from the fund under the scheme will contribute to fees and costs – either other fund members will subsidise the scheme or the retirement savings of the members who use the scheme will be further depleted (I look forward to the statement of compatibility with the superannuation objective that will be required by the Superannuation Objective Bill, if it is passed).

The withdrawal benefit will be taxed at the person's marginal rate and will be subject to a 30% tax offset.

If this is starting to sound slightly complex, it gets more difficult when thinking about how a voluntary contribution will be distinguished from another contribution. It is not entirely clear that a person has to have the relevant purpose when they make the contribution and there is no suggestion that the contribution would be flagged in any way. Instead, the proposal assumes that the person will have an employer who makes 'compulsory' contributions to a fund for them and that they will, in addition, make 'voluntary' contributions, using a salary sacrifice arrangement. The ATO will have to rely on employers to tell them which contributions are made to avoid an SG Charge, which are made to comply with an award or industrial agreement (do these count as voluntary contributions?) and which are salary sacrifice contributions. It will be even more difficult if the person is a self-employed person. A self-employed person has no obligation to make contributions to superannuation and so any contributions they make are voluntary contributions. Is it the case that any contribution is a voluntary contribution that can be withdrawn to buy a first home?

In short, the scheme is not as simple as it looks. And that in turn creates a problem for trustees who will have to explain it in their PDSs. At the moment the form and content of a PDS for a super fund is pretty prescriptive. The PDS must tell people that they can use super to save for their retirement and when they can access their super. Most PDSs can't exceed eight pages and they are only able to include additional information that is expressly permitted by the Corporations Act. It would be a stretch to say that that information would include information about the First Home Super Saver Scheme. Some would also say that space is pretty tight and so there is not enough room. We have not heard that Treasury is working on amendments to the Corporations Regulations to update Schedule 10D which sets out the content requirements for a PDS, and even if they are, it is most unlikely that they will be ready by 30 June 2017.

Downsizing

The proposal to reduce barriers to downsizing is much simpler. But again the details are pretty thin on the ground and so there are a number of questions to be answered. The proposal is that a person who is over 65 may sell their home (their primary residence) and contribute up to $300,000 of the proceeds to superannuation. In order to be able to do so they must have lived in the home for 10 or more years. The person does not have to satisfy a work test in the SIS Regulations and the $1.6 million cap on non-concessional contributions will not apply. The fact sheet says that where there is a couple, they may each contribute up to $300,000 to super. It doesn't say whether both members of the couple have to own the house as joint tenants or tenants in common and it doesn't say whether if there are more than two tenants in common all of them can contribute up to $300,000 to their super. As to age 65, it is not clear whether the owners would both have to be over 65 or whether it would be enough if one is, and it also doesn't say whether the proceeds of the sale must be paid immediately to a superannuation fund.

And finally, while the fact sheet speaks about downsizing, there is nothing to suggest that that is itself a condition. If the other conditions are met, it seems the downsizer could buy a bigger house, a more expensive house or no house at all – whether or not it is more suitable for their needs.

The scheme also creates a real risk to the elderly – it is very possible that real estate agents might start giving superannuation advice. ASIC will need to be vigilant and arguable trustees too will need to think about whether and what they should be saying to their members who are reaching, or in, retirement about the scheme. Trustees will have to provide some information to members because the scheme affects contribution rules, but it should not be their responsibility to warn members against unscrupulous real estate agents.

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