Super rules to explain to your children

We’re all used to thinking about our own super. But in fact some super rules may be more relevant for the next generation (or even the one after). What should you make sure your kids know?

For those of us of a certain age, super is an obvious place to save. It’s beneficially taxed, there are lots of investment options (particularly in an SMSF), and we don’t have too long to wait before we can take it all back out again if we want to.

But the same is definitely not true for those in their 20s and 30s. At that time of life, it’s tempting to give super the bare minimum in terms of both money and attention.

If you have family members in this stage, I completely understand their position. But there are two quirky super benefits it might be worth telling them about which could be surprisingly valuable.

The first is Government co-contributions. And let’s not be ageist about this, it’s available up until age 71 so it’s not just for the youngsters.

I like to describe this to my own children as “free money from the Government”. The deal is this : you put up to $1,000 of your own money into super (a non-concessional contribution) and the Government will put another 50% of this amount (so up to $500) into your super account for nothing. The Government’s contribution is known as a “Government co-contribution”.

There are a few catches. It’s only possible for people who are working (at least 10% of their income must come from a salary or running a business) and it’s means tested based on income. The maximum Government co-contribution of $500 is only available to people whose income is less than around $43,000 and people with income of around $58,000 or more don’t get this at all. Anyone who is somewhere in between can still get a Government co-contribution but the maximum amount is lower than $500.

Of course, the person also has to be allowed to make their own (non-concessional) contribution to super in order to get the Government co-contribution. But these days, almost everyone from 0 up to 75 can do this – they can be a child, retiree or anywhere in between (just remember the rule above about having to earn at least 10% from working to get the co-contribution). Some people can technically make non-concessional contributions but their legal cap on these is $nil (in other words, they could make contributions but extra taxes would apply). In 2023/24, for example, this would apply to anyone with $1.9m or more in super at 30 June 2023. Those people are specifically ruled out of the Government co-contributions but then again, they’re probably not too fussed about the bonus $500 either!

The young people in your life might not be super keen on locking up $1,000 of their own money just to get $500 that they can’t get back for another 30-40 years. But it is a pretty good rate of return for those who can. (Or those whose generous parents or grandparents are prepared to give them the money to make the contribution.) And there are many life situations where it could apply – young people who are working part time and still studying (even under 18), those working part time while raising a family or those working full time in the early stages of their career.

The second super benefit worth discussing for those who wouldn’t ordinarily be keen on super (yet) is the First Home Super Savers Scheme (FHSSS). This is a rule that essentially allows some people to tap into their historical super contributions to buy their first home. Of course there are lots of rules but this could be a handy boost for a home deposit.

It’s only available for a first home – so anyone who has ever owned property in Australia before is ruled out (even if that wasn’t a property they lived in). It has to be a home (not an investment property) and there are deadlines about how quickly the money has to be used once it’s released from super. One very important feature of the rules at the moment is that the application to release the money has to be made before signing a contract to buy or build the property (this is to be moved to settlement date from September 2024 but current applications are still based on contract date).

Unfortunately only certain “voluntary” contributions can be released. This includes, for example, personal contributions or salary sacrifice contributions. But it doesn’t include compulsory employer contributions (Super Guarantee). It could even include (say) the $1,000 contributed to secure the Government co-contribution but not the $500 co-contribution itself. It also doesn’t include contributions made by a spouse.

Effectively, the law is allowing people to save “extra” in their super fund for their home deposit but not tap into their compulsory retirement savings. This is probably one of the reasons people don’t use this scheme as much as might be expected – those saving for a home are not usually topping up their super at the same time.

The maximum amount that can be released is a bit complicated.

First, it’s only 85% of any “concessional” contributions (salary sacrifice contributions from an employer or personal contributions that have been claimed as a tax deduction). That makes sense – these contributions were taxed at 15% when they were paid into the fund so only 85% is left. In contrast (logically) it’s 100% of any “non-concessional” contributions. Both of these amounts are increased by some notional investment earnings (currently around 7% pa).

But then there are further limits.

The maximum amount of contributions to be taken into account for release is $50,000. So if all of the contributions were non-concessional contributions, the maximum amount would be $50,000 (plus earnings). In contrast, if all of the contributions were salary sacrifice contributions (over many years), the maximum amount the member could actually get out would only be $42,500 (85% of this amount), plus earnings. And then there’s tax – more on this below.

And only $15,000 from any one year can count. (So getting the maximum would require multiple years of voluntary super savings before buying the home.)

Fortunately, when someone applies to the Tax Office to use this scheme (which can be done via myGov), the Tax Office works all this out and lets them know the maximum that can be released and how it’s broken down between the different types of contribution.

Finally, when the money is actually released, the bit that comes from earnings and concessional contributions (but not non-concessional contributions) is taxed. The tax rate is the member’s normal marginal tax rate less a 30% tax offset.

The net result is that as a general rule, someone on a marginal rate of income tax that’s higher than 30% can actually save tax by making salary sacrifice contributions and using this scheme to get them back for a house deposit. Someone on a lower tax rate can potentially also save tax but only if they have enough personal income to “use up” the 30% tax offset.

And of course, it's entirely possible that the first home for a couple will be the first home for both of them - so both might be able to access their super under the scheme. 

There’s nothing to stop the young people in your life using both the FHSSS and Government co-contributions. Imagine helping them to make non-concessional contributions of $1,000 pa for the next 10 years. They’ll have built up $10,000 (plus earnings) towards their home deposit in their super fund. At the same time, the Government will have given them up to $5,000 in Government co-contributions. While they can’t take the co-contributions back out for their home deposit, they have at least boosted their super without locking up their spare cash for years to do it.