House of Representatives

Explanatory Memorandum

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

Chapter 2 - Payments from a First Home Saver Account

Outline of chapter

2.1 Division 3 of Part 3 of the main Bill provides for the circumstances in which money may be paid from a First Home Saver Account (FHSA).

2.2 This chapter outlines those circumstances and the processes that must be followed by FHSA providers and holders in relation to payments.

2.3 In this chapter, payment refers to any money leaving the FHSA, withdrawal refers to money being paid from an FHSA to the individual, transfer refers to movement between two FHSAs (similar to portability in superannuation) and contributions to superannuation refers to money being contributed from an FHSA to superannuation.

Summary of new law

2.4 As FHSAs are intended to encourage saving for a first home, the circumstances in which FHSAs can be accessed will be limited to ensure the tax concessions and Government contributions provided to these accounts are used for the intended purpose.

2.5 The main ways money can be paid from an FHSA are:

•

for the purchase of a first home in Australia (see paragraphs 2.23 to 2.40);

•

by being contributed to superannuation (see paragraphs 2.44 to 2.50);

•

by being transferred to another FHSA (see paragraphs 2.51 to 2.56); and

•

when the individual reaches age 60 (see paragraphs 2.41 to 2.43).

2.6 There are a number of other situations in which money can be paid from an FHSA. These include:

•

where the account holder dies;

•

under a family law obligation;

•

for a payment of fees to the account provider;

•

for a payment in respect of overpayments of Government contributions;

•

for the return of contributions which should not have been accepted by the provider; and

•

under certain consumer protection provisions in the Corporations Act 2001 (Corporations Act).

2.7 The payment rules in the main Bill do not override the Bankruptcy Act 1966 . This means account providers are not prevented from paying the trustee in bankruptcy an amount from an individual's FHSA.

Purchase of a first home

2.8 In order to withdraw money from their FHSA, an individual under age 60 must request a payment and declare the payment will meet the payment conditions outlined in subsection 17(1). That is, the money will be used in acquiring a qualifying interest in a dwelling, and that that dwelling will become the individual's main residence.

2.9 In addition, 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. However, if an account cannot receive further contributions under section 27 because it has breached the account balance cap, the requirement is that the account holder has had an account open in at least four financial years.

2.10 If the individual is acquiring a qualifying interest together with another individual, or group of individuals, the four-year rule only needs to be met by one of the people acquiring an interest.

Transfer to another First Home Saver Account

2.11 Individuals are permitted to move between account providers.

2.12 To transfer from their existing FHSA provider to another, an individual will need to make an application to either their current provider, or their new provider.

2.13 Account providers will be required to act on this transfer request within 30 days.

Contributing to superannuation

2.14 Individuals can contribute the balance of their FHSA to superannuation at any time. This recognises that an individual's circumstances may change, and that they may no longer wish to save for a first home.

2.15 To contribute their FHSA to superannuation, an individual will need to make an application to their FHSA provider. Account providers will be required to act on a request to contribute to superannuation within 30 days.

2.16 In addition, where an individual is no longer eligible to have an account, the account must be closed and the balance contributed to superannuation.

Detailed explanation of new law

General rules on making payments from First Home Saver Accounts

2.17 FHSA providers can make payments from an FHSA only:

•

for the account holder acquiring a qualifying interest in a first home in Australia (under section 32);

•

after the account holder has reached age 60 (under section 33);

•

upon the death of the account holder;

•

as a contribution to superannuation (under subsection 22(2) and section 34);

•

as a transfer to another FHSA (under section 35);

•

to return contributions which should not have been accepted (subsections 25(2), 26(2) and 27(2));

•

to fulfil an obligation under certain consumer protection provisions in the Corporations Act;

•

under a family law obligation;

•

to collect fees; and

•

to pay an amount owing to the Commonwealth in respect of overpayments of the Government contribution.

[ Section 31 ]

2.18 However, as the payment rules in the main Bill do not override the Bankruptcy Act 1966 , account providers are not prevented from paying the trustee in bankruptcy an amount from an individual's FHSA. [ Section 128 ]

2.19 An FHSA provider who makes payments from an FHSA in other circumstances commits an offence (see paragraph 2.64 for more detail) and a penalty of up to 100 penalty units applies. However, a contravention does not affect the validity of a payment. [ Subsections 31(2) and (3) ]

Payment of entire balance

2.20 In most cases when money is paid from an FHSA, the entire balance must be paid. This requirement is discussed in more detail under the relevant payment provisions.

2.21 The exceptions to the requirement recognise legitimate circumstances where a partial payment from an FHSA should be allowed. These are:

•

under a family law obligation;

•

a payment of fees from the FHSA; and

•

a repayment of overpaid Government contributions.

2.22 As the payment rules in the main Bill do not override the Bankruptcy Act 1966 , account providers will not be prevented from paying the trustee in bankruptcy an amount less than an individual's entire balance. [ Section 128 ]

Purchase of a first home

2.23 To withdraw money from their FHSA to purchase a first home, an individual must make an application in the approved form to their FHSA provider requesting that an amount be paid. This is known as a home acquisition payment . [ Section 14 and paragraph 32(1)(a) ]

2.24 The approved form rules permit the Commissioner of Taxation (Commissioner) to identify the information necessary for account holders to give to their provider. To assist the Commissioner with compliance activity, it is intended this will include information identifying the home proposed to be acquired.

2.25 Providers are unable make a home acquisition payment where the account is inactive. An inactive account indicates there may be problems with the eligibility of the account holder to have the account, and therefore it is not appropriate to allow money to leave the account. See Chapter 1 for a description of inactive accounts. [ Paragraph 32(1)(e) ]

2.26 The FHSA holder must have declared in the application that the payment will meet the payment conditions set down in subsection 17(1). That is, the money will be used to acquire a qualifying interest in a dwelling, and that that dwelling will become the individual's main residence. [ Paragraph 32(1)(b) ]

In acquiring a home

2.27 The payment conditions specify an amount equal to the payment must be used in acquiring a qualifying interest in a dwelling within six months of the payment being made from the FHSA. The dwelling must be in Australia (this includes the Territories of Christmas Island and Cocos (Keeling) Island) or Norfolk Island. [ Paragraph 17(1)(a) ]

2.28 As money is fungible, the words 'an amount equal to the payment' in the payment conditions ensure money withdrawn from an FHSA does not need to be tracked to ensure it is used in acquiring a qualifying interest in a home. It is sufficient for an amount equal to the amount withdrawn to be used.

2.29 The words 'in acquiring' are designed to cover a range of situations where individuals acquire an interest in a dwelling. The following examples demonstrate where a payment will and will not be used in acquiring a qualifying interest in a dwelling.

Example 2.1

Andrew wishes to purchase his first home. After finding the perfect home, he wishes to use the money in his FHSA for the deposit.

Andrew can withdraw his money, because using the money to pay the deposit is using it 'in acquiring a qualifying interest in a dwelling'.

Example 2.2

Daniel, a builder, wants to withdraw money from his FHSA to purchase a block of land on which he will build his home.

Daniel can withdraw his money because using the money to purchase the block of land is using it 'in acquiring a qualifying interest in a dwelling'. In this case, purchasing land is part of the process of acquiring an interest in a dwelling.

See paragraph 2.31 and Example 2.6 for other conditions relating to the purchase of land.

Example 2.3

Anna, Daniel's next door neighbour, already owns a vacant block of land on which she wishes to have Daniel build her first home.

Anna can withdraw her money, as using the money to pay Daniel to build the home will be using it 'in acquiring a qualifying interest in a dwelling'.

Example 2.4

Rahul is currently renting an apartment in which he lives, and he also owns an investment property. He would like to move into his investment property, but wants to renovate it first.

He will be unable to withdraw the money from his FHSA to pay for the renovations, because as he already owns the property, he is not using the money 'in acquiring a qualifying interest in a dwelling'.

2.30 The funds from an FHSA may be withdrawn to purchase or construct a home even if, under the same contract or arrangement, other dwellings are being purchased or constructed that will not be the person's main residence.

Example 2.5

Lian engages a developer and enters into a contract for them to build three townhouses on a block of land she owns. Lian will use the money in her FHSA to help fund the cost of one of the units, which she will occupy as her main residence. As she satisfies the other eligibility conditions for the withdrawal of the money in her FHSA, Lian can withdraw the money to pay the developer.

2.31 When money is being withdrawn for the purchase of land, or a dwelling which is not complete, the construction must be completed within a reasonable period after the withdrawal. This ensures that the individual cannot defeat the occupancy rules by delaying the completion of their home. [ Paragraph 17(1)(c) ]

Example 2.6

Following Example 2.2, Daniel withdraws his money to commence building his home. However, due to severe weather conditions, construction takes longer than usual.

As the delay was caused by the weather, it is reasonable for the construction to have taken longer than usual, and therefore Daniel will meet the payment conditions.

Occupancy rules

2.32 In order to meet the payment conditions, the dwelling must be the individual's main residence for six continuous months, starting within a designated period. [ Paragraph 17(1)(b) ]

2.33 For a dwelling that is complete when the payment is made, the designated period starts when the person acquires the dwelling. For a dwelling that is not complete when the payment is made, the period starts when the construction is complete. Whether a dwelling is complete is a matter of evidence and a building completion certificate (eg, a certificate of occupancy) would be relevant (and normally sufficient) evidence. The period ends 12 months after the period starts or at a later time that the Commissioner considers reasonable in the circumstances. [ Subsection 17(2) ]

Example 2.7

Joshua wishes to use his FHSA to purchase a house by the beach. He intends to use it as a holiday house for one week a year, and rent it out for the remainder.

Joshua will not be able to use his FHSA, as the house would not be his main residence for six continuous months.

2.34 See Chapter 1 for more detail on the definition of 'main residence'.

Recontribution

2.35 If an individual would otherwise fail the payment conditions, they will be treated as having satisfied them, if, within six months of the payment, the individual contributes to an FHSA an amount equal to the payment or, a lesser amount that is reasonable in the circumstances. [ Subsection 17(3) ]

Example 2.8

Andrew withdraws $20,000 from his FHSA to purchase the home in Example 2.1. However, the vendor withdraws the home from sale after Andrew has incurred $4,000 in legal costs as part of his expenses to acquire the home. To satisfy the payment conditions, Andrew must either acquire another home within six months or return $16,000 to an FHSA. Contributing $16,000 to a new FHSA (as opposed to the $20,000 he withdrew) will be reasonable in the circumstances because of the $4,000 he spent on legal fees.

Four - year rule

2.36 A payment cannot be made from an FHSA to purchase a first home unless personal contributions of at least $1,000 have been made in respect of the FHSA holder in each of at least four financial years. However, if an account cannot receive further contributions under section 27 because it has breached the account balance cap, the requirement is that the account holder has had an account open in at least four financial years. Account providers will need to verify that this condition has been met. [ Subparagraphs 32(1)(c)(i) and (ii) ]

2.37 Alternatively, if the individual is acquiring a qualifying interest together with another individual, or group of individuals, the four-year rule only needs to be met by one of the people acquiring an interest. The individual will need to declare this is the case. [ Subparagraph 32(1)(c)(iii) ]

Example 2.9

Adrian and Vinita are purchasing their first home together. Adrian has been in the workforce longer than Vinita, and has made contributions of $8,000 in seven separate financial years. Vinita however, has only had her account open for one year.

To withdraw her money, Vinita must declare that she is purchasing her home with Adrian, and that Adrian has made contributions of at least $1,000 in four or more financial years.

Adrian to withdraw his money, his provider must verify the four-year rule has been met.

2.38 The main Bill allows for regulations to be made specifying other requirements that need to be met. [ Paragraph 32(1)(d) ]

2.39 A home acquisition payment will generally be the entire balance of the FHSA. Where this is not the case, the account will become inactive, and the balance must either be contributed to superannuation, or if the account holder is over age 60, paid directly to them. See Chapter 1 for a description of inactive accounts. [ Section 23 ]

2.40 A payment under this section will be tax free. [ Schedule 1, item 31, First Home Saver Accounts (Consequential Amendments) Bill 2008 (FHSA (Consequential Amendments) Bill 2008), subsection 345-50(2) of the Income Tax Assessment Act 1997 (ITAA 1997) ]

Age 60

2.41 Account holders who have reached age 60 may request, at any time, that their FHSA be paid to them. The request must be in the approved form. [ Paragraphs 33(1)(a) and (b) ]

2.42 Consistent with the treatment of superannuation for individuals aged 60 and over, a payment under this section will be tax free. [ Schedule 1, item 31, FHSA (Consequential Amendments) Bill 2008, subsection 345-50(2) of the ITAA 1997 ]

2.43 Payments at age 60 will generally be the entire balance of the FHSA. Where this is not the case, the account will become inactive, and the balance must be contributed to superannuation. See Chapter 1 for a description of inactive accounts. [ Section 23 ]

Contributions to superannuation from a First Home Saver Account

2.44 At any time, an account holder may request, in the approved form, that the entire balance of their FHSA be contributed to a complying superannuation plan. Requiring the entire balance to be contributed prevents individuals from periodically contributing money to superannuation to avoid reaching the account balance cap. [ Paragraphs 34(1)(a) and (b) ]

2.45 Complying superannuation plan has the same meaning as in the ITAA 1997 and means a complying superannuation fund, a complying approved deposit fund, a retirement savings account or a public sector superannuation scheme. [ Section 18 ]

2.46 The contribution must be to a superannuation interest held by the account holder, unless there is a family law obligation which requires the FHSA to be contributed to another individual's superannuation interest (see paragraphs 2.57 and 2.58 for an explanation of family law obligations). [ Paragraph 34(1)(a) and subparagraph 31(1)(c)(i) ]

2.47 Contributions to superannuation from an FHSA will be treated as non-concessional contributions in the hands of the receiving superannuation fund as they will not be included in the fund's assessable income (see Chapter 7 for more detail). [ Schedule 1, item 24, FHSA (Consequential Amendments) Bill 2008, section 295-171 of the ITAA 1997 ]

2.48 However, amounts contributed from an FHSA will not be eligible for the superannuation co-contribution as the money within the account may already have attracted a Government contribution and/or been concessionally taxed. [ Schedule 3, item 37, FHSA (Consequential Amendments) Bill 2008, paragraph 7(1)(v) of the Superannuation (Government Co-contribution) for Low Income Earners Act 2003 ]

2.49 As they are required to contribute the amount to a complying superannuation plan, providers will need to confirm that the superannuation plan nominated by the account holder is a complying plan.

2.50 Providers making contributions to superannuation will be required to provide the superannuation provider with a statement in relation to the payment. This statement will be required to be in the approved form. See Chapter 8 for more detail. [ Schedule 1, item 65, FHSA (Consequential Amendments) Bill 2008, section 391-10 of the Taxation Administration Act 1953 (TAA 1953) ]

Transfer to another First Home Saver Account

2.51 An account holder may request, at any time, that the entire balance of their FHSA be transferred to another FHSA provider. The request must be in the approved form. Requiring the whole balance to be transferred ensures individuals do not have two FHSAs open at the same time. [ Paragraphs 35(1)(a) and (b) ]

2.52 Providers are unable to make a transfer where the account is inactive. [ Paragraph 35(1)(c) ]

2.53 The transfer must be to another FHSA held by the account holder, unless there is a family law obligation which requires the FHSA to be transferred to another individual's FHSA (see paragraphs 2.57 and 2.58 for an explanation of family law obligations). [ Paragraph 35(1)(a) and subparagraph 31(1)(c)(ii) ]

2.54 These provisions allow an account holder to give the transfer request to their prospective FHSA provider and have the prospective provider arrange the transfer (on the account holder's behalf) directly with the old provider. That is, the words 'an FHSA holder requests the FHSA provider' cover the holder making the request of their existing provider via their prospective provider.

2.55 An amount transferred from one FHSA to another FHSA will not be a personal contribution and will not be subject to the prohibition on accepting contributions once the account balance has reached the account balance cap. This recognises that FHSA balances can grow above the account balance cap due to interest/earnings and Government contributions and that this should not prevent account holders changing providers. [ Paragraph 11(3)(a) and subparagraph 27(1)(b)(ii) ]

2.56 Providers making transfers to another FHSA will need to ensure that it is a valid FHSA and will be required to provide the other provider with a statement in relation to the payment. This statement will be required to be in the approved form. See Chapter 8 for more detail. [ Schedule 1, item 65, FHSA (Consequential Amendments) Bill 2008, section 391-10 of the TAA 1953 ]

Other payments

Family law

2.57 As FHSAs are intended to be used to purchase a first home, generally funds cannot be paid directly to an account holder's spouse or ex-spouse under a family law obligation. However, the balance of the FHSA can be split under a family law obligation and transferred to an FHSA, or contributed to a superannuation interest, of the account holder's spouse or ex-spouse. The amount transferred or contributed may be the whole or part of the balance of the FHSA. Where the account holder's spouse or ex-spouse is over age 60, the amount may be paid directly to them. [ Paragraph 31(1)(c) ]

2.58 A family law obligation is either a court order under the Family Law Act 1975 , or a financial agreement under Part VIIIA of that Act, which is binding because of section 90G of that Act. [ Section 18 ]

Return of the product under the Corporations Act 2001

2.59 The Corporations Act allows individuals to return a financial product and have their money repaid in certain circumstances. Because this Bill would otherwise override these circumstances by limiting when an account provider can make a payment, provision has been made to allow account holders to have their money paid from their FHSAs in accordance with specified provisions in the Corporations Act.

2.60 The situations where an account holder will be able to access their money are:

•

where there has been unsolicited offer of an FHSA (subsection 992A(4) of the Corporations Act);

•

where the product disclosure statement was defective (section 1016F of the Corporations Act); and

•

within 14 days of opening the account (section 1019B of the Corporations Act). Section 19A of the Corporations Act is to be amended to include FHSAs within the cooling-off requirements [ Schedule 2, item 14 of the FHSA (Consequential Amendments) Bill 2008 ].

[ Subparagraph 31(1)(d)(ii) ]

Death

2.61 Account providers will be able to release money on the death of an account holder. The FHSA will form part of the deceased's estate in the same way as other assets and will not be taxable in the hands of the beneficiary. [ Paragraph 31(1)(e) ]

Bankruptcy

2.62 The Bankruptcy Act 1966 makes provision for the division of property on bankruptcy. As contributions to FHSAs are all voluntary, the payment rules in this Bill will not override anything in that Act. This means that the trustee in bankruptcy will be able to access the funds in an FHSA. This differs from the treatment of superannuation for bankruptcy purposes. [ Section 128 ]

Timing of payments and offences

2.63 Upon receiving an application for the release of funds for the purchase of a first home, at age 60, to contribute to superannuation or transfer to another FHSA, the provider must make the payment as soon as is practicable, and in any event within 30 days of the application having been made. A provider who fails to comply with this payment rule commits an offence and a penalty of up to 100 penalty units applies. However, a contravention does not affect the validity of a payment. [ Subsections 32(2) to (4), subsections 33(2) to (4), subsections 34(2) to (4) and subsections 35(2) to (4) ]

2.64 The offence provisions in Division 3 of Part 3 of this Bill do not specify which fault elements apply. Under section 5.6 of the Criminal Code Act 1995 , where an offence provision does not specify a fault element, the fault element will be:

•

for a physical element that consists of conduct - intention; and

•

for a physical element that consists of circumstances or a result - recklessness.