Bills Digest no. 138 2007–08
First Home Saver Accounts Bill 2008
WARNING:
This Digest was prepared for debate. It reflects the legislation as
introduced and does not canvass subsequent amendments. This Digest
does not have any official legal status. Other sources should be
consulted to determine the subsequent official status of the
Bill.
CONTENTS
Passage history
Purpose
Background
Financial implications
Main provisions
Concluding comments
Contact officer & copyright details
Passage history
First Home Saver Accounts Bill
2008
Date
introduced: 28 May
2008
House: House of Representatives
Portfolio: Treasury
Commencement:
On the day after it
receives Royal Assent. In practical terms, First Home Saver
Accounts would be able to be opened or issued on or after 1
October 2008.
Links: The
relevant links to the Bill, Explanatory Memorandum and second
reading speech can be accessed via BillsNet, which is at http://www.aph.gov.au/bills/.
When Bills have been passed they can be found at ComLaw, which is
at http://www.comlaw.gov.au/.
The purpose of this Bill are to
introduce a new principal Act to provide for the establishment of
first home saver accounts (FHSA), provide for the payment of the
government contribution to these accounts, and govern the accounts
operation and prudential regulation.
The Bill implements a commitment made by the government during
the 2007 election campaign to assist first home buyers to save a
deposit for their first home.
Some indicators suggest that home loan affordability in
Australia is currently at a record low. Moreover, some have it that
home loan affordability will decline still further in the immediate
future in response to further inflation and to interest rate
increases imposed by the Reserve Bank and individual
lenders.[1] March
quarter 2008 data show an overall national decline of affordability
the ratio of median family income to average loan repayments in the
past year of 8.7 per cent. The proportion of median family income
required to meet average home loan repayments (of $2,070 per month)
across Australia is currently 38 per cent, an increase of 8.3 per
cent over that of March 2007.
The situation with regard to rental affordability is equally
dire. In the year to March 2008, the proportion of median weekly
family income required to meet median weekly rent has risen by 8.3
per cent to 24.7 per cent of median family income across
Australia.
In this context of declining home loan and rental affordability,
and with the weighted average median house price across Australia s
capital cities standing at $424 400 at the end of the June quarter
2007, many would-be first home buyers are experiencing difficulty
in saving a deposit. This is partly reflected in the declining rate
of first home buyer participation in the housing market.
Over the March quarter 2008, there was a decline of two per cent
in the share of first home buyers as a percentage of total housing
finance commitments. The proportion of first home buyers was 16.4
per cent in comparison with an average of 20.0 per cent over the 16
year period since July 1991.[2]
In the 2007 election campaign, the government made a range of
commitments to improve housing affordability in Australia,
including a pledge to set up low-tax accounts to assist first home
buyers to save a deposit for a home. The details of the proposed
first home saver accounts were initially sketched out in a
fact sheet.
On 8 February 2008, the government released a
discussion paper outlining the proposed arrangements for the
accounts and sought submissions on this paper as a part of the
consultation process. On 13 May 2008, Treasurer Wayne Swan
announced the outcome of the government s consideration of the
issues raised in the submissions. In response to the submissions,
the government:
- dropped the salary sacrifice arrangements, through which first
home buyers could have made contributions to their accounts
- deferred the commencement of the policy until 1 October 2008 to
enable account providers more time to develop products
- removed the $1,000 upfront contribution and the link to
residency to open an account
- replaced the $10 000 annual contributions cap with an overall
account balance cap of $75 000 (indexed to average weekly ordinary
time earnings), after which no further personal contributions can
be made
- replaced the tiered system of government co-contributions which
indexed government co-contribution amounts to account holders
marginal tax rates with a flat 17 per cent government
contribution
- clarified that the four year withdrawal rule is calculated on a
financial year basis, rather than from the day on which the account
is opened, and
- simplified the product disclosure requirements and provided for
a 14-day cooling-off period for potential first home saver account
holders.[3]
The government maintained the taxation incentives
associated with the accounts with investment earnings taxed at 15
per cent and withdrawals tax free, so long as they are used to
purchase a first home to live in.
The government noted that a number of further
issues raised during the consultation process were considered, but
not proceeded with as they would have resulted in a significantly
higher cost to revenue, changed the nature of the accounts or added
complexity for the consumer .[4]
On the whole, commentary to date has been supportive of the
FHSA. Most approve of the proposed scheme on the grounds that it
should both assist first home owners to breach the deposit gap and
save for a home, and help to develop and encourage a culture of
savings in Australia.[5] Indeed, in an editorial earlier this year The
Advertiser argued that State and Territory Governments would
do well to follow the Australian Government s lead and introduce
equally attractive tax breaks to encourage and assist struggling
families out of the rental market and into their own homes.[6] That said, a number of
concerns have been raised regarding aspects of the scheme. These
concerns have mostly to do with elements of the FHSA that are
likely to limit its appeal and take-up.
Some commentators have expressed concerns that the FHSA may
contribute to a further worsening of the state of the housing
market.
Because the FHSA is a demand-side policy that would, were the
Bill to be passed, give first home owners more money to spend in an
already tight market, some fear that the accounts could further
increase house prices and thereby exacerbate the financial stresses
to which many would-be home buyers are currently subject.[7] It should be noted that
requiring home buyers to save over a minimum four year period is
likely to have a dampening effect on inflation in the short- to
medium-term as consumption falls and saving rises. However, when
this period elapses, the likely influx of first home buyers could
generate unwelcome short-term instability in the housing
market.[8] The only
means to counter such threats is through supply-side measures that
increase the stock of housing and, thereby, improve overall housing
affordability. This can be achieved through policies that, for
example, make available further land for housing and that
streamline processes that constrain the supply of land and
housing.
The government s proposed $512 million Housing Affordability
Fund and the establishment of a National Housing Supply Council are
measures that are calculated to help to achieve this.[9] If implemented, the
Housing Affordability Fund while not targeted at first home buyers
will assist local governments to reduce the cost of water,
sewerage, transport and other services for new housing development,
as well as reducing costs associated with planning and approval.
These cost savings are to be passed on to home buyers in newly
developing areas. Some commentators have argued that the Housing
Affordability Fund will help first home buyers to some extent by
making land cheaper.[10]
However, the fact that the FHSA are, with the assistance of the
Housing Affordability Fund, likely to encourage first home owners
to enter newly developing areas is a source of concern to some
commentators. Such a move, they argue, is likely to have negative
impacts on young first home buyers and the residential property
market.[11] For
example, according to Armstrong and Johnston,[12] many young people see their
first home as a lifestyle choice rather than as an investment
second only to superannuation as a potential source of wealth. This
fact, when combined with the assistance provided by the FHSA and
the Housing Affordability Fund, could encourage new home buyers to
buy in newly developing, outlying areas. Such moves would,
Armstrong and Johnston argue, be likely to weaken the property
market in these locations (where they claim supply is relatively
high and demand low among investors as opposed to first home
buyers) and to result in first home owners finding it difficult to
accumulate equity fast enough to outstrip the rates of interest
being paid on their mortgages.
This, Armstrong and Johnston claim, is an issue for first home
buyers and not for governments. As Armstrong and Johnston see it,
first home buyers would be better off purchasing smaller properties
in the middle suburbs. This would improve their ability to build
equity through capital growth and break up first home buyer
enclaves in outlying areas. While Armstrong and Johnston may be
correct in their assessments, it should be noted that in the
current residential property market, the availability of homes in
middle suburbs is likely to be limited, and these homes, even where
modestly sized, are likely to be too expensive for many first home
buyers.[13] One
proposed means of freeing up housing for first home buyers in
middle and inner suburbs would be to change the current income and
asset tests that provide a disincentive to older people to downsize
their homes and release additional homes for younger
people.[14]
A number of commentators have expressed reservations with regard
to the equity of the FHSA and its eligibility criteria. Some feel
that the entry criteria are unnecessarily restrictive and that this
could exclude from the scheme many of those people who need
assistance most.
Some have argued that the assistance available through the
scheme should be made available to any person who does not
currently own their own home and not just to people who have not
previously owned a home. These commentators observe that many
people may, through a variety of circumstances, have lost their
home and find themselves in a position similar to that of a first
home buyer: wanting to enter the housing market with limited
funds.[15] Were
FHSA eligibility to be assets tested, this could potentially
address such equity concerns. Assets test-based eligibility could
also deal with the argument from some quarters that there should be
tighter targeting for high income earners under the scheme. It has
been noted that some individuals accessing the scheme may have
investment properties (rather than houses in which they have
previously lived) or inherited real estate, and have little need of
the scheme s benefits.[16]
Some would like to see the minimum entry age of 18 years
removed, so as to encourage maximum use of the FHSA and to promote
savings discipline as early as possible, including among school
leavers and new employees.[17]
In debate over the Bill, Shadow Minister for Housing, Sussan Ley
expressed some reservations with regard to the equity of the FHSA
and their eligibility criteria. The government is to provide a
co-contribution of 17 per cent on the first $5,000 contributed
annually for all account holders. This amounts to a maximum
government contribution of $850 per annum. However, given that
household expenses, and especially rental costs, are currently so
high, many individuals and households on low incomes are likely to
struggle to save such an amount. Indeed, some individuals and
households may experience difficulty in meeting the $1,000
contribution amount required for four financial years under the
proposed scheme, an amount that would realise a government
co-contribution of $150. As a result, low income earners will gain
far lower government co-contributions than will those on higher
incomes.
Nevertheless, it should be noted that the FHSA are now more
equitable in this respect than they were in their initial guise.
Under the proposed system as it was described in the First Home
Saver Accounts Outline of proposed arrangements discussion paper,
the government co-contribution would have been tied to the account
holder s income tax rate. This would have resulted in those paying
a higher rate of tax receiving a higher co-contribution rate than
those on lower incomes and paying less of their income in
tax.[18] In
response to criticisms,[19] the government introduced a flat 17 per cent rate,
under which, theoretically, high and low income earners can gain an
equal amount of government money from the accounts. The government
also imposed an overall account balance cap of $75 000 on all FHSA
to limit the amount that can be saved in the accounts and ensure
that the assistance provided to first home buyers is targeted
appropriately .[20]
While the government has addressed the inequity of the scheme
where it comes to government co-contributions, it is still possible
for high income earners to gain greater benefits from the scheme
than might low income earners. This is due to the FHSA taxation
incentive arrangements, which tax investment earnings at a flat
rate of 15 per cent. Because some low income earners pay less than
15 per cent marginal income tax in any case, the accounts would be
of no benefit to them in this regard. High income earners who are
on tax rates of 40 or 45 per cent, on the other hand, would stand
to benefit substantially from this arrangement. As the Canberra
Times Economics Editor, Peter Martin, sees it, this renders
the scheme untenably unfair .[21] Like Martin, Trowbridge Deloitte note that the
ability to earn investment income taxed at 15 per cent benefits
those on higher incomes. However, they go on to suggest that that
this would only be a benefit to those who are not repaying their
loans, and it is, in any case, one that is already available to
such people, particularly wealthier investors.[22]
Another point worthy of mention is that because individuals are
able to contribute the balance of their FHSA to superannuation at
any time, this raises the possibility that some wealthier
participants could use the scheme as a means to gain extra
government contributions towards their superannuation. Should the
Bill be passed and the FHSA introduced, this aspect of the scheme
would need to be monitored.
The opposition has also expressed concerns that because the
accounts belong to individuals, and do not consider the home
ownership status of these individuals spouses, there is scope for
people who are not the struggling first home buyer the bill is
trying to assist to gain tax-payer funded assistance.[23] Generally speaking,
their concern is that the FHSA could be used by some people who are
not struggling as a measure for tax planning purposes, rather than
as primarily a means to purchase a first home. Potentially, an
individual s spouse could own a home in which that individual is
living, start up an FHSA, purchase a house, live in it for the
period stipulated as part of the FHSA criteria, and then rent the
property.[24]
Alternatively, the couple could live in the first home purchased
using the assistance of the FHSA, and rent out the property owned
by the spouse. The couple could, moreover, gain two lots of
government assistance in the process, both via the First Home Owner
s Grant and the FHSA.
While there is certainly scope for abuse of the FHSA in this
respect, arguably alternative arrangements whereby an individual s
eligibility to open an account are affected by the eligibility of
their spouse, are unfair (see above).[25]
Perhaps the most consistent criticism of the FHSA is that the
scheme s withdrawal provisions are too restrictive; it is not
possible to withdraw the account monies before the four year point
and, if they are withdrawn, they must be transferred to
superannuation. For one thing, as the FHSA criteria currently
stand, this renders the scheme only appropriate for those would-be
first home owners who start saving at around the time of the scheme
s commencement.[26]
People who have already started saving and who intend purchasing
their first home in the next four years are likely to be
discouraged from participating in and benefiting from the
scheme.[27]
Moreover, some people who enter the scheme in good faith but find
that they need to withdraw early (perhaps because they find
themselves in a position to purchase their ideal, and affordable
home) will be penalised .[28] Following similar lines it has been argued that
participants would be disadvantaged in relation to others who are
not participating in the scheme in that they are not able to take
advantage of potential troughs in the residential property market
without exiting the scheme, transferring their FHSA savings to
superannuation and borrowing sufficient funds for a home deposit
from elsewhere.[29]
Various solutions have been proposed to perceived problems
associated with the withdrawal provisions.
Some argue that early savers who may be discouraged from
investing in the scheme should be given credit towards the
satisfaction of the four year minimum contribution term.[30] Others propose that
government contributions to the account could be based on an
escalating scale, peaking after four years, so as to encourage both
the use of the scheme and long term disciplined savings.[31] Some commentators feel
that the FHSA criteria should be amended to allow for the
withdrawal of funds at any time, so long as this is for the
purchase of a first home.[32] Others agree that the account balance should be able to
be withdrawn early, and specify that this should be with no penalty
other than the tax advantage forgone as a result,[33] and/or the government
contributions.[34]
Another proposed alternative is to make available early the
individual s contributions only, with any concessionally taxed
interest earnings and government contributions transferred into
superannuation.
One other suggested option is to allow account holders to access
their FHSA savings after the purchase of a home, so long as the
account monies are then used to reduce the mortgage or outstanding
housing payments.[35] While this option would enable participants to withdraw
from the scheme without incurring a penalty, it is reliant upon
participants capacity to use other assets for the purchase of a
home, thereby defeating, to a degree, the purpose of the
scheme.
Generally speaking, it is felt that the need for the FHSA to
promote savings demands that some disincentives if not
necessarily penalties be placed upon early withdrawals.
One point worth noting is that the four year minimum term could
make the FHSA more enticing to wealthier individuals who do not
necessarily need the account funds to purchase a home, and are
therefore able to use the account for tax planning purposes.
The opposition spokesperson also takes issue with the
requirement that personal contributions of at least $1,000 be made
in each of at least four financial years in order for payments to
be made from an FHSA to purchase a first home.[36] This, she argues, is
unnecessarily restrictive, especially where an account holder could
have made contributions of significantly more than the $1,000
threshold amount in one or more financial years, but still not
qualify for access to FHSA funds as a result of falling below the
threshold in a single financial year. The Australian Institute of
Superannuation Trustees has similarly argued that the requirement
is unnecessary and should be removed.[37]
Some concerns have been expressed regarding the capacity of FHSA
deposits to keep up with growth in residential property prices. NAB
Capital notes that if the accounts offer historical term deposit
rates or current online account rates, there is the potential for a
growth gap to remain between housing price and deposit returns.
This, some argue, is especially likely if there is insufficient
participation in the scheme and a resultant lack of competition
among financial institutions providing accounts.[38] One suggested means of linking
FHSA deposit returns to the growth in housing prices, and thereby
ensuring that account holders realise a return that keeps pace with
housing prices, is linking the FHSA to a residential property price
index. In advancing this proposal, NAB Capital notes that
traditional savings accounts and share market linked accounts
either do not give adequate returns and/or move independently to
the property market. [39]
According to the Explanatory Memorandum an account holder is
able to request, at any time, that the entire balance of their FHSA
be transferred to another provider.[40] As a result, were FHSA gleaning
inadequate returns, a sufficiently financially literate account
holder could transfer at any time their account balance to another
FHSA provider.[41]
However, the opposition has expressed fears that few young people
possess such financial literacy skills.[42] They suggest that the government
should promote and enhance financial literacy programs which will
assist young Australians [to] learn how to deal with their finances
so that people don t continue to find themselves in situations of
financial stress that they simply cannot manage .[43]
Some commentators appear to view the assessment that housing
prices will outstrip FHSA returns as unduly pessimistic. For
example, Chairman of The Money Managers, Kevin Bailey, has argued
that the notion that house prices only rise and that saving for a
deposit is futile will be exposed as a fallacy as rising interest
rates eventually stymie housing market growth. As he sees it, the
key is that the FHSA may need to be used for longer than four
years, both in order to accumulate a sufficiently substantial
deposit and to wait for housing affordability conditions to
improve.[44]
A number of observers have criticised the requirement that
public offer fund trustees who offer FHSA do so under a separate
trust structure from their existing superannuation trust.[45] As they see it, this
requirement would create significant administrative costs for
trustees, and reduce economies of scale, both on a macro level, by
preventing potential FHSA providers from entering the market, and
on a micro level, by demanding that the FHSA is managed as a
separate sub-fund under different arrangements. Various
commentators also disapproved of the restriction that limited FHSA
provision to public offer fund trustees. Non-public offer funds,
they argued, should also be allowed to offer FHSA,[46] as should self managed
superannuation funds.[47] This would, in their view, provide a greater range of
options for would-be FHSA holders and thereby ensure maximum
take-up of the accounts.
The government has rejected criticisms of the requirement for a
separate trust structure. It has done so on the grounds that this
condition preserves the integrity of Australians retirement savings
by preventing cross-contamination and cross-subsidisation of First
Home Saver Accounts by superannuation where the funds of
superannuation members (many of whom will be ineligible to ever
open an account) are used to fund the start-up and operating costs
of the accounts .[48] The government deliberately excluded non-public offer
funds and self managed superannuation funds from the scheme,
because these funds are not subject to prudential regulation by the
Australian Prudential Regulation Authority (APRA). It continues to
maintain this position. In response, some advocates of self managed
superannuation schemes being able to offer FHSA have argued that
these funds are subject to a sufficient level of regulation by the
Australian Tax Office (ATO).[49]
Two of the key thresholds within the FHSA Bill are to be indexed
based on a defined indexation formula. Specifically, subsections
30(3), 30(5), 40(3) and 40(5) provide the reader with the necessary
inputs to calculate the indexation factor, from defined index
numbers, for both the maximum account value threshold and the
maximum value of savings which will receive a government
contribution. Subsections 30(5) and 40(5) indicate the relevant
variable for the index number is:
the estimate of full-time adult average weekly
ordinary time earnings for the middle month of the quarter first
published by the Australian Statistician for that month.
The technical issue with this provision is that the Australian
Statistician, via the Australian Bureau of Statistics, publishes
the relevant index value in three formulations. These are original
terms (unadjusted), seasonally adjusted terms (adjusted for
seasonal factors) and trend terms (adjusted to represent an
underlying trend within the original data). Each of these data will
yield a different index, and as such a clarification about which
presentation of the data should be applied would be a useful
addition to the Bill.
The Bill will generate distinct winners and first home buyers
(FHB) who will not benefit. The following summarises those FHB who
are not expected to benefit, and identifies the benefits to those
who are expected to be winners.
Based on public commentary and qualitative analysis, there are
distinct population groups who will not benefit from this Bill.
Many of these are identified in other areas of this Digest. Those
unlikely to benefit from the Bill include:
- FHBs intending to purchase a home before 1 July 2012, which is
the beginning of the fifth financial year after the proposed
commencement date
- FHBs who are intending to draw on alternative sources for a
home deposit (such as family, other layered finance options or
inheritances)
- FHBs who simply cannot save, and
- FHBs whose incomes are provided with concessional tax
treatments already, although they may still receive some benefit
from the government contribution.
The FHSA scheme will help those FHBs who are not identified as
being unlikely to benefit, by boosting savings and interest
earnings and lowering the rate of taxation on this form of private
savings. This section investigates how these gainers will benefit
from the scheme.
The goal of the account proposed by this Bill is a savings
amount to assist FHBs to purchase a new home. Accordingly, it is
instructive to consider the economic value of the accounts,
including the government contributions to the account, to
understand the actual assistance being offered to individuals. This
section canvasses the easily quantifiable value of the accounts,
considers a couple of possible scenarios, and uses the values of
the account to hypothesise the value of homes that can be
purchased.
From the terms of the legislation there are a few clear
parameters that can be identified for the individual account
holders. The most obvious parameters, assuming no indexation,
include:
- a minimum account balance of $4 000, plus interest and
government contributions, as the individual is required to
contribute a minimum of $1 000 per annum in order to use the
FHSA
- the maximum account value would be $75 000 plus any
accrued interest and government contributions, as savings above
this level are precluded
- assuming someone wants to maximise the contribution from the
government, the minimum rate of monthly savings would be $417 per
month over four years. Any additional savings will yield no further
direct government support. All of the earnings in the account would
be charged a concessional tax rate and the value of the tax
concession will depend on the earnings rate of the account
- based on the government contribution rate, and someone
achieving the maximum annual contribution threshold of $5 000,
the government contribution would be $850. If the saver matched the
threshold in each of the four years, the maximum value of the
government contribution over four years would be $3 400,
and
- the first feasible date for a home to be purchased using a FHSA
would 1 July 2012, being the beginning of the fifth financial year
from the proposed commencement date.
These points assume no indexation and that the
Bill is brought into law in line with the commencement date.
However, the legislation does allow for adjustments to the
maximum account value and the government contributions threshold by
an index based on the change in December quarter movements in the
average weekly full-time ordinary time earnings (AWOTE).
Regrettably, there are no reliable forecasts of AWOTE growth to
estimate the indexation factor values. However, the Australian
Government Budget provides wage price index (WPI) forecasts, which
can be used as a proxy for growth in the AWOTE levels. Using the
WPI assumptions, Table 1 indicates the expected growth in the value
of the maximum account threshold, the government contribution
thresholds, and the maximum potential government contribution over
the current forecast horizon.
Table 1: Threshold expectations (at end of
December)
|
Item
|
|
|
2009
|
2010
|
2011
|
2012
|
|
Maximum account value threshold
|
$75
000
|
$80
000
|
$80
000
|
$85
000
|
|
Government contribution threshold
|
$5
000
|
$5
000
|
$5
500
|
$5
500
|
| |
|
|
|
|
|
|
|
Maximum government payment (at 17 per cent)
|
$
850
|
$
850
|
$
935
|
$
935
|
| |
|
|
|
|
|
|
|
Indexation factor
|
1
|
1.041
|
1.083
|
1.126
|
| |
|
|
|
|
|
|
|
Notes
|
-the
value thresholds are rounded to the nearest $5 000
|
|
| |
-the
government contribution threshold is rounded to the nearest
$500
|
| |
-the
indexation factor is rounded to three decimal places
|
|
| |
-indexation factor assumes AWOTE will follow wage price index
growth
|
| |
|
|
|
|
|
|
|
Source
|
2009
data: FHSA Bill 2008
|
|
|
|
| |
Indexation: Australian Government, Statement 1: Budget Overview ,
Budget Paper No. 1 2008 09, Commonwealth of Australia, Canberra,
2008, p 1-3.
|
Based on these data, the amount available to individuals grows from
$850 to $935 per year over the forecast years, and the total
government contribution would be $3 570. In addition,
individuals savings can be increased by up to $10 000, from
$75 000 to $85 000. These data are dependent on the WPI
forecasts being realised in terms of AWOTE.
The true value of the account to the holder, when aiming to
purchase a property, will depend entirely on how much is saved, the
rate of interest, and the timeframe over which the savings are
made. This type of detail cannot be known because every individual
will have different goals and means. However, the Bill provides
sufficient detail to allow the statistics section of the Library to
model two scenarios, based on the threshold expectations in Table
1. The two scenarios are:
- an individual who regularly saves just enough to receive the
maximum rate of government contributions, and
- an individual who invests an initial amount, and then saves
enough to achieve the maximum threshold, in order to achieve the
maximum account balance ($85 000) at the end of December
2012.
The first scenario represents the minimum savings rate
to gain maximum government contributions. The second scenario is
akin to the maximum savings that the scheme can support.
To ensure a measurable benefit is generated, the scenarios are
compared to a baseline of the savings patterns, with no government
contribution, and a marginal tax rate of 30 per cent (rather than
the concessional rate of 15 per cent for FHSA holders). Summary
results are presented in Table 2 below.
Under the first scenario, where the saver merely meets a target
of achieving the maximum Government contribution each year, the
individual will have around $28 200 in August 2012 to
contribute to a house purchase. Of this amount $21 750 will
have been saved by the individual (77 per cent), nearly $3 400
will have been earned in interest (12 per cent) and the
net contribution of government (contribution less tax)
would be around $3 080 (11 per cent). If the FHSA scheme was
not in place, and the saving were the same, this individual would
be around $4 340 worse off due to lower after tax interest
earnings and no government contributions.
Under the second scenario, where the saver meets a target of
achieving the maximum government contribution each year, and
invests in order to ensure the account value is at the maximum
threshold by 1 January 2013, the individual will have around
$80 500 in August 2012 to contribute to a house purchase.
Of this amount $64 250 will have been saved by the
individual (80 per cent), with around $43 750 needed to be
deposited when the FHSA is first opened. Nearly $14 900 will
have been earned in interest (18 per cent) and the net contribution
of government (contribution less tax) would be around $1 403
(1 per cent). If the FHSA scheme was not in place, and the saving
levels were the same, this individual would be around $6 130
worse off due to lower after tax interest earnings and no
government contributions.
Clearly these scenarios are based on assumptions. However, they
do provide an indicative range of values for deposits available to
FHSA accounts.
Using these scenario results, current data on house prices and
some analytical projections it is possible to consider the range of
house prices that move into the feasible purchase set for FHBs.
This is complicated issue however, because house prices, incomes,
and lending criteria all change over time.
To simplify the issue we have projected the current levels of
the first home loan using the compound annual growth rate (CAGR)
over the most recent 15 year period. This data would provide a
quasi no change value to the level of the first home loan. To this
we have added the value of the FHSA at the assumed price offer date
of July 2012 (settling in August 2012). Table 3 summarises the key
results.
Table 3: Funds available to purchase (FHSA plus
first home loan)
Using this technique the range of funds available under scenario
A is from $245 600 to $387 900. For those able to save at
a higher level, the range of funds available is from $297 900
to $440 200. In the table we have also used the CAGR method to
project future house prices. While these assumptions lead to very
linear price growth paths, and other existing schemes are not
included in the calculation, it is clear that even with government
support the resources available to FHBs are substantially below the
median house prices in each capital city. This suggests a
continuation of FHBs purchasing below median style properties.
In the main body of the FHSA Bill 2008, a range of results is
presented relating to the future value of FHSA accounts. This
section summarises the key assumptions, and presents the detailed
modelling results. These are primarily in relation to scenario A
and B as listed under Key Issues .
In order to calculate the scheme s effects, the key assumptions
include:
- a government contribution rate of 17 per cent to the maximum
contribution level
- government contribution threshold levels in line with Table 1
in the body of the text
- maximum account value thresholds in line with Table 2 in the
body of the text, and
- a tax rate of 15 per cent on the earnings of the account
(excluding contributions which are post tax, and the government
contributions).
All of these parameters are in line with provisions of the FHSA
Bill. The only additional assumption used for the FHSA is that an
account provider does not charge an account keeping fee.
When dealing with compound interest calculations the choice of
certain timing issues can affect the long run results. In these
scenarios the common timing assumptions are:
- an individual opens the FHSA account on 1 November 2008
(allowing time for the market to introduce an account)
- all deposits are made at the beginning of each month, and
interest is accrued at the end of the month
- tax returns are submitted such that the tax is finalised,
taxation is calculated and the FHSA is paid by 1 August each
year
- the first feasible exit date is 1 July 2012, being the first
day of the fifth financial year, allowing exactly four financial
years to pass from the commencement date, and
- the date that an offer is made is around the same date as the
end of the fourth financial year, such that the settlement for the
property would fall beyond 1 August 2012, allowing for the final
government contribution to be paid.
The only deviation from this timing system is that scenario B
aims to achieve the balance of $85 000 which would occur as at
1 January 2013. This does not affect the tables, but is set as a
target.
In the scenarios and the funds available to purchase
calculations, a range of growth assumptions are assumed. Indeed, it
is necessary to make assumptions about rates of return to the FHSA
holder as well.
Table 4 provides a summary of the assessments of available data,
which have lead to the assumptions around growth.
Table 4: Growth rate assumptions
For the AWOTE data, we have estimated high and low compound
average growth rates (CAGRs),[50] and then found a mid point of those rates. The
AWOTE used is industry specific wage CAGRs. The mid point for the
15-year CAGR period is 4.3 per cent, which is remarkably close to
the forecasts for WPI in published budget papers. We have left
budget paper forecasts in the model as they are forecast across the
forward years.
For deposit interest rates we have used a current period average
rate. The rate is the middle of the highest and lowest available
deposit rate in April 2008 for all deposits of $10 000 or
more, and where term deposits are included, with term expiries
greater than one year. The rate assumed from this data is 6.33 per
cent per annum.
Table 4 also summarises the CAGR growth rates for median house
prices and the average first home loan level. These CAGRS are used
to project future house price and loan levels to assess the
additional value of the FHSA in terms of future purchasing
power.
There are limitations to all of these methodologies. Indeed, we
have not accounted for expected price inflation, a range of
alternative interest rates or performed any serious sensitivity
testing. However, the purpose of the assumptions and results is to
paint a practical picture of the value of the accounts to FHB.
Table 2 in the FHSA Bill 2008 Bills Digest summarises the net
results of the two scenarios, including comparisons to fixed
baselines. The next two tables provide a detailed time series of
the underlying calculations. Each column is labelled, and the only
additional information worth noting relates to deposit rates.
Under scenario A the account holder would need to:
- deposit $1 250 at the opening of the account
- deposit $417 per month from 1 November 2008 until 1 December
2009, and
- deposit $458 dollars per month from 1 January 2010 until they
withdraw the funds.
Under scenario B the account holder would need
to:
- deposit $43 748 at the opening of the account
- deposit $417 per month from 1 November 2008 until 1 December
2009, and
- deposit $458 dollars per month from 1 January 2010 until they
withdraw the funds.
Detailed results
Scenario A
Detailed results Scenario B
According to the Explanatory Memorandum, the amendments in the
First Home Saver Accounts Bill 2008, the First Home Saver Accounts
(Consequential Amendments) Bill 2008 and Income Tax (First Home
Saver Accounts Misuse Tax) Bill 2008 will have a fiscal cost of
around $1.2 billion over five years (including administration
costs).[51]
Earlier estimates of the cost of the First Home Saver Accounts
indicated that the scheme would cost $950 million over four years
on a fiscal balance basis and excluding departmental administration
costs.[52] In
response to comments received during the consultation process, the
government subsequently committed additional funding.
The Bill is divided into 8 Parts. These broadly cover:
- definitions and key concepts, Parts 1 and
2
- eligibility of providers and contributors, contribution and
payment rules, Part 3
- government contributions to FHSA including under- and
overpayments, Part 4
- administration, Part 5
- enforcement procedures, including information gathering and
access to premises, Part 6
- the prudential provisions, Part 7
- miscellaneous matters, Part 8.
Not all Parts will be dealt with in this section of the
Digest.
Parts 1 and 2: Preliminary
provisions, key concepts and definitions, clauses 1-18.
The Commissioner of Taxation will be responsible for the
administration of Parts 3, 4, 6, and all of Part 5, apart from
division 4 subdivision B (see next paragraph) (clause
3).
The Australian Prudential Regulatory Authority (APRA) will be
responsible for Part 5 division 4 subdivision B (which relates to
review of decisions of APRA), and Part 7, subject to certain powers
and duties of the Australian Securities and Investments Commission
(ASIC) under the Superannuation Industry (Supervision) Act
1993(clause 3).
Clause 7 gives a simplified outline to the Act which
says in part:
- the Act will provide for first home saver accounts (FHSA) to be
offered by certain financial institutions
- payments from FHSA are subject to conditions such as a
requirement to use a payment towards the purchase of a first
home
- there will be an FHSA misuse tax under the Income Tax
Assessment Act 1997 if there is a failure to comply with
payment conditions or if a person holds an FSHA while
ineligible
- the Act will provide for the approval of entities that can be
providers, and for the supervision of such entities, but not
authorised deposit-taking institutions (ADIs) (which are dealt with
under the Banking Act 1959), and life insurance companies
(which are supervised under the Life Insurance Act
1995).
- FHSA will be subject to concessional treatment in respect of
income tax and social security benefits, similar to that of
superannuation. These concessional matters will be by amendments to
the Income Tax Assessment Act 1997, the Social
Security Act 1991 and the Veterans Entitlements Act
1986.
Clause 8 delineates what is a first home owner
saver account (FHSA). An FHSA will be an individual
s:
- Account or
- Life policy or
- Beneficial interest in a trust
It must be described as an FHSA, and opened or issued after 1
October 2008 (or a later specified date in regulations) and must
be:
- an account to which an ADI does or will accept deposits
(contributions), or
- a life policy issued by a life insurance company or
- a beneficial interest in a trust, the trustee of which is an
authorised FHSA provider.
In each case (account, policy or trust), the person must be the
sole owner or holder of the particular interest (clause
9).
Clause 15 provides for the eligibility
requirements that a person has to meet to be an FHSA holder. These
include that a person must be an individual, over 18 and under 65,
and never held a qualifying interest in a dwelling in Australia or
Norfolk Island at a time when the dwelling was the person s main
residence (paragraphs 15(1)(a)-(c)).
A personal FHSA contribution is defined in
subclause 11(2) to be a contribution that a person
makes, or that is made for the benefit of a person (but not a
government contribution). Some payments are excluded from this
definition, for example where payments are made by virtue of family
law obligations or if they are repayments or recontributions
(subclause 11 (3)). The second reading speech
states that personal contributions can be made by the account
holder or a parent or grandparent[53] and the Explanatory Memorandum gives an
individual s partner or employer as examples of who can make a
contribution for the benefit of the holder of the account.[54]
Clause 12 states that a person will hold a
qualifying interest in a dwelling if the person is the sole or
joint legal owner of the dwelling, and this can include certain
legal and other holdings in a lease or licence, a flat or home
unit, an aged care facility or retirement village. A dwelling that
is not fixed to land is excluded (this can mean boats and caravans
and the like)[55]
(subclause 12(5)).
Clause 13 says the meaning of main residence
has its ordinary meaning though regulations can be made specifying
when and when not a dwelling is a main residence. Dwelling is not
defined in the Bill but the Explanatory Memorandum[56] says that dwelling will also
have its ordinary meaning and:
Includes a unit of accommodation that is fixed
to the land such as:
- A house, flat,
unit apartment or townhouse; or
- A demountable
dwelling or re-locatable home where it is fixed to land.
Clause 18 has general definitions of
expressions used throughout the Bill. For example, a family
law obligation is defined because clause
31 of the Bill expressly refers to restrictions on
payments from FHSA unless these are authorised by law (see further
below). A complying superannuation plan has the
same meaning as in the Income Tax Assessment Act 1997,
[57] and a
default superannuation plan has the meaning given
in clause 24 of the Bill.
Part 3: Eligibility, contribution
and payment rules clauses 19-35
Clauses 20 and 21 outline circumstances when
the eligibility requirements cease to be met and the holder of the
FHSA, or the Commissioner of Taxation, provide notice that the
requirements are not being satisfied. Clause 22
permits the FHSA provider to close an inactive FHSA and directs how
the balance is to be paid. If the FHSA holder is aged 60 or over
the payment can be made to the person if he or she has given a
statement to the provider that that is what the holder wants; in
all other cases it is made to the particular superannuation
interest of the holder, or to the FHSA provider s default
superannuation plan (subclauses 22 (2) and
(3)).[58]
An FHSA will become inactive when:
- The provider receives notice from either the holder or the
Commissioner (and has received no revocation of that notice
(paragraphs 23 (1)(a)-(c)
- A payment is made which must have been made under
clause 32 (for home acquisition) or clause
33 (when the holder is aged 60 or over), and the
balance immediately after the payment is more than
nil (italics added, possible drafting error)
(paragraph 23(2)(c))[59]
- The holder is 65 years or older (subclause
23(3))
- When a holder already had an FHSA account and was required to
ensure that the balance of that account would be transferred to the
(new) FHSA account (under paragraph 19(1)(b)(ii))
and this transfer did not occur within 44 days since the new JFSA
was opened or issued (clause 23(4)).
Clause 29 provides that the account balance cap
for the 2008-09 financial year is $75 000, to be indexed annually.
A breach of the account balance cap will occur at a time the
balance of an FHSA exceeds the cap for that financial year subject
to certain exceptions (subsections 28 (2) and
(3)). A breach under clause 28 does not
incur an offence for the FHSA holder.
Clauses 25, 26 and 27 have limits on
contributions in circumstances where the account holder is aged 65
or over, when the FHSA is inactive or when the holder is in breach
of the account balance cap. With certain exceptions, the provider
will commit an offence in the event of contravention of
subclauses 25(1), 26(1) and 27(1) incurring a
penalty of 100 penalty points ($1 100).[60]
A provider can only make payments from an FHSA account in
limited circumstances (clause 31). These are
primarily when the holder has met all the requirements of
clause 32, the holder has reached aged 60 under
clause 33, the payment is a contribution to
superannuation under clause 34 or
subsection 22(2), or the payment is a voluntary
transfer to another FHSA under clause 35.
Payments can also be made:
- to return contributions that should not have been accepted
(under subsections 25(2), 26(2) or 27(2))
- in accordance with consumer protection obligations in the
Corporations Act 2001
- if the FHSA holder is deceased (subclause
31(1)(e))
- to pay fees to the provider
- to meet certain family law obligations
- to repay the Commonwealth in the event of overpayments of
Commonwealth contributions.
Clause 128 allows payments out of a FHSA to the
trustee in bankruptcy if a holder becomes bankrupt and if it is
property divisible within the meaning of section 116 of the
Bankruptcy Act 1966.
Part 4: Government FHSA
contributions clauses 36-51.
Divisions 1-4 of this Part of the Bill govern government FHSA
contributions under the scheme. It provides for whether a person is
eligible for a government FHSA contribution, how payments are made
and what happens when an underpayment or an overpayment occurs.
A person is required to have made one or more personal FHSA
contributions during the financial year (paragraph
36(1)(b)) and has to meet certain taxation and residency
requirements (subsections 36 (1) and
(2)).
Clause 39 provides for the threshold as
follows:
The Government FHSA contribution
threshold for the 2008-09 financial year is $5 000.
This amount is indexed annually.
According to the Explanatory Memorandum[61] this means for that financial
year:
Government contributions are paid on the first
$5 000 contributed to an individual s FHSA each year. The amount is
indexed annually .
The Commissioner of Taxation must make a determination that a
FHSA contribution is payable (subclause 41(1)) and
if the Commissioner does so, the Commissioner must also determine
where the contribution is to be paid. There are 4 possibilities
under subsection 41(3):
- To an FHSA held by the person
- To a superannuation interest
- To the person, or
- To the person s personal representative.
The payment must be made within a timeframe (60 days after
receipt of tax information and an FHSA statement)
(subclause 42(2)). If the Commissioner pays none
of the government contribution on or before that date, interest
will be payable on the unpaid amount (clause
44).
Part 5: Administration Clauses
52-76.
This Part contains matters necessary for the administration of
the Bill relating to:
- use of tax file numbers and quotation of tax file numbers
- secrecy, being a provision that is a replica of other secrecy
provisions[62]
- review of decisions by the Commissioner of Taxation and certain
APRA decisions.
Part 6: Enforcement Clauses
77-88
Part 6 gives information gathering powers to the Commissioner
(Clauses 77-78). A person is not excused from
giving a statement to the Commissioner on the ground of
self-incrimination, but such a statement cannot be used in evidence
in criminal proceedings except in proceedings under clauses 77 and
78, or pursuant to sections 137.1 or 137.2 of the Criminal
Code.[63] The
Scrutiny of Bills Committee has examined this provision and accepts
that there is a reasonable balance between the competing interests
of gathering information and protecting individual rights, and has
no further comment on it.[64]
The Commissioner can in writing appoint persons to be authorised
persons for the purposes of Division 2 of Part 6 for entry of
premises to gather information. Entry can be with permission or
under a warrant issued by a Magistrate (subclause
81(1) and clause 87.)
Part 7: Prudential Provisions
Clauses 89-125
Chapter 5 of the Explanatory Memorandum gives an outline of the
prudential regulatory framework for the FHSA scheme, particularly
on the inter-relationship with other legislation such as the
Banking Act 1959, the Life Insurance Act 1995 and
the Australian Prudential Regulation Authority Act 1998.
The Explanatory Memorandum s summary from pages 74 and 75 is
produced at Appendix A of this Digest.
Clause 128 requires the Commissioner of
Taxation to prepare an annual report on the working of the Act, to
the extent that the Commissioner has the general administration of
this Act . There is no requirement in the Bill for APRA or ASIC to
prepare annual reports, but the Explanatory Memorandum states that
they will include information about their administration of FHSA in
their own annual reports under existing obligations.[65]
Clause 129 refers to an acquisition otherwise
than on just terms in the context of section 51(xxxi) of the
Constitution but then provides that the Commonwealth is liable to
pay a 'reasonable amount of compensation'. It should be noted that
this clause:
- does not specifically apply paragraph 51(xxxi) Constitution to
the acquisition
- does not require just terms
- provides that the Commonwealth is liable to pay a reasonable
amount of compensation , as distinct from just terms .
It should be noted that use of such a provision
is becoming commonplace, for example, section 519 of the
Environment Protection and Biodiversity Conservation Act
1999 and in section 60 of the Northern Territory
Emergency Response Act 2007. However, its meaning is
currently before the High Court in respect of the latter Act in the
part-heard case, Wurridjal & Anor v Commonwealth of
Australia (part-heard, unreported). In that case, counsel for
the plaintiffs submitted in relation to the provision:[66]
..but, we had understood the Commonwealth
Parliament was in effect saying that we [the Parliament] abrogate
the just terms provision of the Self-Government Act, we will not
give you any compensation unless we are constitutionally required
to give it because section 51(xxxi) requires it. If section
51(xxxi) requires it we say what we have offered without reasonable
compensation is just terms, but if the terms otherwise are not just
we will give you reasonable financial compensation.
The case is currently adjourned, with the hearing likely to be
after 1 July 2008 (when there will be a change in the Senate) or in
September 2008.[67]
Concluding comments
While most agree that there is a need to promote increased
private savings in Australia, and to reduce inflation, questions
have been raised as to whether or not FHSA are likely to gain the
critical mass necessary to contribute to the realisation of either
of these goals. This is largely a result of the scheme s being
viewed as too restrictive in its eligibility criteria. It has also
been argued by some that FHSA are too complicated for consumers and
for financial institutions to administer, and that this is likely
to reduce the level of take-up.
In terms of their possible impact on assisting more young
Australians to purchase their first home, FHSA need to be
considered as a part of the broader package of housing
affordability measures introduced by all tiers of government. Much
of the success or otherwise of the FHSA would depend on the degree
to which these other measures prove successful in increasing the
supply of housing.
Full and further details and examples are contained in Chapter 5
of the Explanatory Memorandum.[68]
[6]. Editorial,
Give aspiring home owners a break , The Advertiser, 5
February 2008.
Matthew Thomas
Diane Spooner
Adrian Makeham-Kirchner
16 June 2008
Bills Digest Service
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