The Coalition Government, in trying to avoid making people need a separate superannuation account to use the First Home Super Saver scheme, have in some ways made it more complicated than necessary – without necessarily improving outcomes.

Under FHSS, which I explained in my last column, the amount that a person can withdraw is made up of 100 per cent of their non-concessional contributions, 85 per cent of salary-sacrifice and personal deductible concessional contributions, plus associated earnings on those contributions using a deemed rate of return.

This deemed rate is the shortfall interest charge (SIC) rate – which is the 90-day Bank Bill rate plus 3 per cent. The SIC rate changes quarterly; for the September 2018 quarter, it is 4.96 per cent. The September quarter deemed earning rate is equivalent to a 5.84 per cent earning rate before the usual 15 per cent tax rate applying to income earned in an accumulation account.

The first step in a member applying for a release under the FHSS is requesting from the Australian Taxation Office a determination of their allowable FHSS amount. The member can apply to the ATO to have the determination reviewed and, if necessary, lodge a formal objection against the determination.

Once the FHSS amount has been agreed upon, a request must be lodged with the ATO for the maximum amount or a lesser amount to be released. The ATO will then issue a release authority to the member’s superannuation fund for the funds, less any applicable withholding tax.

Given the length of time it could take to receive a determination and have the ATO issue a release authority to the superannuation fund, and given that the super fund could then take several weeks to action that authority, anyone wanting to use the FHSS scheme should take care to receive the payment before committing to buy a property, unless they have sufficient funds outside of superannuation to make the deposit.

Individuals or couples that use the FHSS scheme have up to 12 months to enter into a contract to purchase a home. Amounts received will be taxed at their marginal rate of tax less a 30 per cent offset.

The benefit of the FHSS scheme relates to the amount that can be saved after tax. For someone not using superannuation, the savings must be done after income tax has been paid, while under the FHSS scheme, a higher amount can be invested with a relatively high income rate being earned.

The tax-effectiveness of the FHSS is reduced because tax is payable by the person receiving the payment, at their marginal tax rate, when the FHSS payout is received. After taking into account the 30 per cent tax offset, the actual amount of tax and Medicare levy paid the majority of people pay will be either 4.5 per cent or 9 per cent.

I have estimated, based on someone who is saving $5000 a year after tax, on a marginal tax rate of 34.5 per cent including Medicare levy, earning 3 per cent on their savings before tax, after five years they would have about $26,000 to purchase a home.

If instead, that person either salary-sacrificed or made personal tax-deductible contributions, the equivalent before tax value of this savings, which at the 34.5 per cent tax rate would be $7634 a year, using the 4.96 per cent deemed earning rate, and an effective tax rate paid on the FHSS amount withdrawn after the offset of 9 per cent, they would have about $32,600.

Max Newnham is in public practice, specialising in small business and retirement tax planning. He is an SMSF specialist and advises on portfolio construction and investments.