Want to give an 18th or 21st present to your Child? Consider a First Home Saver Account (FHSA).

First Home Saver accounts are a new type of investment account designed to help Australians boost their savings for a deposit on their first home. This Government initiative enables super funds and banks to offer a superannuation style investment account that helps maximise savings through tax breaks and Government contributions.

First Home Saver accounts are concessionally taxed (like superannuation), meaning that generally much lower tax will be paid on the investment or interest earnings of First Home Saver accounts, than for regular savings accounts or managed investments.

In addition to this the government pays a 17.00% p.a. contribution on your first $5,500 saved in each financial year (which effectively means that you could be earning 22.5 per cent on every dollar up to $5,500 – not bad!), and earnings are taxed at 15 per cent rather than your marginal tax rate.

The only drawback of these accounts is that you must save at least $1,000 a year for a minimum of 4 financial years. Thankfully the government recently relaxed the rules, allowing you to use the funds in your FHSA to pay off your mortgage if you buy your first home before those 4 years are up.

Remember, that you’re not locked in to a provider – so if another FHSA increases their rates, by all means change.

This is a great gift idea for children who are at university or starting a trade giving them the opportunity and head start to purchase a home for themselves.

Who can open a First Home Saver account?

To open a First Home Saver account you will need to:

• Be aged 18 to 65

• Have not previously purchased or built a first home in Australia to live in;

• Not currently have or previously have had a First Home Saver account.

• Provide a tax file number.

How do the savings incentives work?

First Home Saver accounts offer a simple, tax effective way to encourage and maximise saving for a first home deposit through a combination of Government contributions and low taxes.

Government contributions

First Home Saver Accounts attract a flat 17% Government contribution on the first $5,500 of personal savings contributed to a First Home Saver account in any year.

Low tax rates

• Investment earnings (or interest) that accrues in a First Home Saver account are taxed at a maximum of 15 per cent.

• Government contributions are tax free.

• Withdrawals from a First Home Saver account used to purchase or build a first home are tax free.

Adding to your account

• There are no restrictions on who can contribute to an individual’s First Home Saver account, whether it’s the account holder, family member, employer, or friends. All contributions must be from after-tax income, and a tax deduction cannot be claimed.

• There is no minimum annual contribution, but a withdrawal can only be made where contributions of at least $1,000 have been made in each of at least four financial years.

• There is an account balance cap of $85,000, after which no further personal contributions can be made. Note the FHSA account balance cap is periodically indexed in $5,000 increments. This amount is current from the 2011/12 income year.

Cashing out to buy a first home

• Funds can only be withdrawn from a First Home Saver account to put towards purchasing a first home, or building a first home to live in.

• The 4 year rule must first be met (see above).

• The full amount must be withdrawn and the First Home Saver account closed at that time.

Case Study

Sophie is aged 19 as at 1 October 2012 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 Sophie’s savings.

After four years, Sophie 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.

Sophie is projected to have a home deposit of $50,400 when she decides to purchase her first home at age 29.