The Rudd Government will deliver enhanced First Home Saver Accounts, with improvements arising from the consultation process to make the accounts simpler and fairer.
Tonight I am announcing the outcome of the Government's consideration of the issues raised during consultation on the First Home Saver Account discussion paper. The Government has listened to industry and the community, and in response, is committing an additional $150 million over the next four years to further improve the accounts.
The Government is committed to introducing First Home Saver Accounts to provide a simple, tax effective way for Australians to save for the purchase of their first home through a combination of Government contributions and low taxes.
The changes announced today build on the improvements announced by the Government in releasing the discussion paper on 8 February 2008. The Government will further assist working families saving for a first home by providing a Government contribution of 17 per cent of the first $5,000 contributed annually for all individuals.
The Government undertook an extensive public consultation process and received over 150 submissions. The comments made during consultation focused on increasing the attractiveness of accounts and reducing the costs of providing accounts. The Government would like to thank all individuals, businesses and organisations who participated in the consultation process.
The changes mean the Rudd Government will be investing around $1.2 billion over four years in the First Home Saver Account initiative, including administrative costs.
The election policy sought to build on existing arrangements in the tax system by delivering benefits to first home savers that were similar to those for superannuation through salary sacrifice (or equivalent benefits for those who did not have access to salary sacrifice), and low tax on earnings.
In response to industry comments, to reduce complexity, compliance costs and reporting arrangements, the Government has decided not to proceed with salary sacrifice arrangements. This has provided the Government with greater flexibility around the design of the contribution arrangements, as they no longer need to match the benefits of salary sacrifice.
The new contribution arrangements will provide increased benefits to all individuals earning up to $80,000 per annum. It will also simplify the operation of the accounts for individuals, account providers and the ATO.
A couple each earning average incomes both putting aside 10 per cent of their income into individual First Home Saver Accounts would be able to save a deposit of more than $88,000 after five years, compared with $85,000 under the arrangements outlined in the discussion paper.
The Government has also decided to defer the commencement of the policy until 1 October 2008 to enable account providers more time to develop products. First home savers will not be disadvantaged by the deferral as they will still be entitled to a Government contribution on the first $5,000 of personal contributions in 2008-09. The Government will introduce the enabling legislation in the Budget sittings.
Following consultation, the other key changes the Government is making will:
streamline and relax the eligibility criteria to open accounts by removing the $1,000 upfront contribution and the link to residency to open an account;
increase the attractiveness of accounts and reduce compliance costs for providers by replacing the $10,000 annual contributions cap with one overall account balance cap of $75,000 (indexed), after which no additional personal contributions can be made;
make the accounts easier to provide, including by clarifying the way the four-year rule operates so that it is calculated on a financial year basis rather than from the day the account is opened; and
ensure that potential first home savers have a good understanding of the features of accounts by simplifying the product disclosure requirements and providing for a 14 day cooling‑off period in which to change their mind.
It is estimated that these changes will increase savings in accounts from over $4 billion to around $6.5 billion after four years.
The regulators, ASIC, the ATO and APRA are also working closely with industry to make First Home Saver Accounts easier to provide.
ASIC has indicated that it will regard First Home Saver Accounts that are deposit accounts offered by banks, building societies and credit unions as tier 2 products for the purposes of training requirements. Account providers will still have to ensure that staff undertake tier 2 training, plus some First Home Saver Account specific training. All other (market‑linked) accounts will be regarded as tier 1 products.
The ATO is currently meeting with providers to discuss reporting requirements and is endeavouring to use current reporting arrangements as much as possible to reduce the compliance burden.
The product disclosure requirements for First Home Saver Accounts are being developed through the Financial Services Working Group established by the Minister for Superannuation and Corporate Law and will be announced separately.
A range of other issues were raised during the consultation process. These were considered by Government 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.
In particular, public‑offer licensees who choose to offer First Home Saver Accounts will need to offer accounts under a separate trust structure from their existing superannuation trust; and banks, building societies and credit unions will need to calculate the income earned by First Home Saver Accounts separately for taxation purposes and be taxed at the entity level.
The requirement for a separate trust 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.
Changes to the taxing arrangements would mean that consumers could be faced with potentially quite different products depending on the account provider, making it more difficult for them to compare products.
Further detail on the final design features for the accounts, including other changes, are outlined in fact sheets for account providers and account holders which are available on the Homesavers website.
13 May 2008
The changes and the inclusion of administrative costs will add $226 million over four years to the fiscal balance, bringing the total fiscal cost to $1.176 billion over four years ($816 million over four years on a cash basis).
Impact on fiscal balance ($m)
On 1 October 2008, Lindsay and Nina open their own accounts. They are both on average weekly ordinary time earnings (around $61,000 in 2008‑09) and contribute 10 per cent of their gross annual income to their individual accounts. Each receives a 17 per cent Government contribution on the first $5,000 of their individual contributions per annum.
After five years, Lindsay and Nina purchase their first home. Together, they are projected to have a total balance of around $88,500 to use as a deposit.
Ria is aged 19 as at 1 October 2008 and is studying full time. She opens an account to kick‑start her savings for her first home and contributes $1,000 from her part‑time job. The Government contributes $170 per annum to support Ria’s savings.
After four years, Ria graduates from university and commences working full time. She increases her personal contributions to $5,000 per annum which increases the amount of the Government contribution she receives.
Ria is projected to have a home deposit of $50,400 when she decides to purchase her first home at age 29.