House of Representatives

Explanatory Memorandum

Circulated by the authority of the Treasurer, the Hon Wayne Swan MP

General outline and financial impact

First Home Saver Accounts

The First Home Saver Accounts Bill 2008 (FHSA Bill 2008) and supporting Bills implement the Government's election commitment to introduce First Home Saver Accounts (FHSAs).

Overview of arrangements

The Government is introducing FHSAs to provide a simple, tax effective way for Australians to save for the purchase of their first home in which to live, through a combination of low taxes and Government contributions.

The legislation for FHSAs is contained in three Bills:

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the main Bill is the FHSA Bill 2008, which establishes FHSAs, governs their operation, provides for the payment of Government contributions for account holders, and provides for the prudential regulation of account providers;

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the First Home Saver Accounts (Consequential Amendments) Bill 2008 (FHSA (Consequential Amendments) Bill 2008), which contains consequential amendments to other Commonwealth laws, chiefly the taxation and corporations law; and

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the Income Tax (First Home Saver Accounts Misuse Tax) Bill 2008 (Income Tax (FHSA Misuse Tax) Bill 2008), which imposes the misuse tax to clawback benefits obtained by an account holder who improperly uses the accounts.

Chapter 1 outlines the key concepts and definitions which apply to FHSAs. It also outlines who can open an account and the arrangements for making contributions into accounts. To be eligible to open an account, an individual must:

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be aged at least 18 and under 65;

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have not previously owned a home in Australia in which they have lived; and

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provide their tax file number (TFN) to the provider and meet standard proof-of-identity requirements.

For contributions:

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there are no restrictions on who can make a contribution into an FHSA;

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all contributions must be made from post-tax income; and

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there is an overall account balance cap of $75,000 (indexed).

Chapter 2 outlines the circumstances and processes necessary for money to be paid from an FHSA. As a general rule, in order to access money to purchase a first home, personal contributions of at least $1,000 must have been made in respect of the FHSA holder in each of at least four financial years. Individuals are able to contribute the balance of their account to superannuation at any time.

The rules described in Chapter 2 limit the circumstance in which FHSAs can be accessed. The primary reason for accessing money in a FHSA is to purchase a first home in Australia in which to live. Funds can also be accessed:

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as a contribution to superannuation;

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as a transfer to another FHSA;

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when the individual reaches age 60; and

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in other limited specified circumstances.

Chapter 3 outlines the Government contribution arrangements. In general, the Government contribution is applied to up to $5,000 (indexed) of personal contributions into an account in a financial year. The rate of the Government contribution is 17 per cent for all individuals.

Chapter 4 outlines the obligations of FHSA providers before they may offer FHSAs. Authorised deposit-taking institutions (ADIs) and life insurance companies are required to notify the Australian Prudential Regulation Authority (APRA) before offering FHSAs. Trustees who hold the appropriate class of registrable superannuation entity (RSE) licence are eligible to seek authorisation as an FHSA provider.

Chapter 5 outlines the prudential regulation framework that applies to FHSA providers. A new prudential framework applies to RSE licensees that are authorised to provide FHSAs and FHSA trusts which is broadly consistent with the prudential framework that applies to public offer superannuation funds and their trustees. APRA will be able to make prudential standards in relation to authorised trustees and FHSA trusts.

Additional investment management requirements apply to FHSAs offered by authorised RSE licensees and life insurance companies that offer FHSAs as investment-linked life policies.

Otherwise, FHSA providers that are ADIs and life insurance companies are prudentially regulated under the Banking Act 1959 and Life Insurance Act 1995 .

Chapter 6 outlines the tax treatment of FHSAs, which is set out in the FHSA (Consequential Amendments) Bill 2008 and the Income Tax (FHSA Misuse Tax) Bill 2008. The following taxation arrangements apply:

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individual contributions to FHSAs are not taxed as they will be made from post-tax income;

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Government contributions are not taxed;

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withdrawals to purchase a first home are not taxed;

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other withdrawals are generally not taxed.

In addition, earnings on FHSAs are taxed to the account provider at the statutory rate of 15 per cent rather than to the individual account holder. Broadly, this applies in the following way:

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the trustee of an FHSA trust is liable to pay tax at 15 per cent on the taxable income of the trust;

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an ADI calculates an FHSA component of taxable income on a similar basis to a retirement savings account, which is taxed at 15 per cent; and

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a life insurance company calculates (using the virtual pooled superannuation trust method) a class of taxable income for their FHSA and superannuation activities to be taxed at 15 per cent.

Chapter 6 also describes the FHSA misuse tax, which applies to clawback benefits obtained by individual account holders who improperly use the accounts. In general, an FHSA holder is subject to the misuse tax if FHSA money is paid to the FHSA holder to purchase a first home and:

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they were not eligible to open an account;

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they became ineligible and failed to notify the FHSA provider;

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they did not use the money to purchase or build a first home; or

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they failed the occupancy rules.

The tax does not apply if the money is transferred to superannuation, even if the FHSA holder fails one or more of these conditions.

Chapter 7 outlines how the relevant provisions of the Corporations Act 2001 (Corporations Act) and the Australian Securities and Investments Commission Act 2001 (ASIC Act) in relation to financial services licensing, conduct, advice and disclosure apply to FHSAs. The necessary amendments are in the FHSA (Consequential Amendments) Bill 2008. They ensure that FHSAs are:

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accompanied by appropriate disclosure documents (including a product disclosure statement and periodic statements);

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not subject to unnecessary regulation;

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subject to a mandatory cooling-off period; and

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treated the same under the Corporations Act, regardless of the issuing entity and the legal nature of the accounts.

Chapter 8 outlines administration and other requirements, including the provider's legal responsibilities in relation to TFNs; secrecy provisions and reporting of information to the Parliament.

Date of effect : The main Bill and amendments formally commence on the day after the date of Royal Assent. However, practical effect is in relation to FHSAs, which can only be opened or issued on or after 1 October 2008.

Proposal announced : FHSAs were announced in the 2007 Federal election campaign. On 4 February 2008, the Treasurer and the Minister for Housing announced that the Government had formally approved the establishment of FHSAs. A detailed proposal was released for public consultation on 8 February 2008 in First Home Saver Accounts - Outline of proposed arrangements . The Government's final decisions were announced as part of the 2008-09 Budget on 13 May 2008 in Press Release No. 040 issued by the Treasurer.

Financial impact : The amendments in the FHSA Bill 2008 and supporting Bills will have a fiscal cost of around $1.2 billion over five years (including administration costs).

Impact on fiscal balance

Compliance cost impact : There are likely to be medium implementation costs for providers who choose to offer FHSA. However, the design of the initiative as reflected in the law has sought to minimise compliance costs for account providers.