Reaching age 65 has always been a pivotal time when it comes to superannuation and retirement planning - from meeting an automatic age based condition of release to accessing preserved super benefits ( no matter an individual’s work practices or intentions), right through to the requirements, and indeed complications, of meeting the work test in order to make additional voluntary contributions to super.
However, no longer will this time be a hard finish when it comes to final contribution planning as someone approaches, or indeed enters retirement.
Since 1 July 2019, individuals aged between 65 and 74 who have recently retired, may be eligible to make additional voluntary contributions to super where they meet certain eligibility criteria around their previous year of work and their total super balance.
This new opportunity may allow advisers to tackle, and indeed conquer, those tricky situations where an individual may have previously ‘just missed out’ on making that final contribution to super as they were no longer working when they sought your advice.
Under current rules, aged based conditions1 must be satisfied before the trustee of a super fund can accept a contribution on behalf of a member.
Generally, if a member is between the ages of 65 and 74 (inclusive) a superannuation trustee can only accept a voluntary member contribution ‘…if the member has been gainfully employed on at least a part-time basis during the financial year in which the contributions are made’.2
A person is considered gainfully employed on a part-time basis during a financial year if the person was gainfully employed for at least 40 hours in a period of not more than 30 consecutive days in that financial year.3
Gainfully employed is defined as being employed or self-employed for gain or reward in any business, trade, profession, vocation, calling, occupation or employment.4
The work test exemption
Since 1 July 2019, additional contribution eligibility criteria now allows someone who has not been gainfully employed, either on a full-time or a part-time basis during the financial year to still make a voluntary super contribution where all of the following requirements are satisfied5:
- The individual met the work test in the financial year immediately prior to the year of the contribution, and
- The member has a total super balance6 of less than $300,000 at the end of the previous financial year, and
- The member has not previously used the work test exemption in a previous financial year to make a contribution to any regulated super fund.
Voluntary super contributions
Voluntary super contributions are any contributions an individual may choose to make, outside of any required under law (such as superannuation guarantee) or under an industrial award or agreement, which are often referred to as mandated employer contributions.
The work test exemption makes no distinction around the type of contribution an individual could make, it simply allows an individual to make any type of voluntary contribution they would otherwise be eligible to make based on age, contribution caps and any other relevant criteria.
For this reason the work test exemption, amongst other opportunities, may provide individuals with the opportunity to optimise both concessional and non-concessional contribution planning, bring-forward non-concessional contributions, re-contribution and spouse balance equalisation strategies, plus small business CGT contributions.
Example #1 - Sale of an asset
Joanne is 70 years old, retired, and has recently sold an investment property in the 2019-20 financial year resulting in a taxable capital gain of $250,000. Joanne had $290,000 in super on 30 June 2019.
Joanne was previously a self-employed freelance writer and has had sporadic work patterns over the last 5 years. While she had a number of full-time contracts through the 2018-19 financial year, she did not work more than an hour or two a week (i.e. did not meet the work test) during the 2016-17 or 2017-18 financial years, although she did meet the work test in 2018-19 financial year.
Whilst Joanne is not eligible to make a bring-forward contribution in the 2019-20 financial year due to her age, she is eligible to make a $100,000 non-concessional contribution to super by using the work test exemption. She may also consider making a $25,000 concessional contribution, and then claim a tax deduction for the contribution against a portion of the taxable capital gain from the sale of her investment property.
While Joanne did not meet the work test for a number of years after reaching age 65, this doesn’t preclude her from meeting the requirements of the work test exemption. She firstly met the work test in the financial year immediately prior to the year of contribution, and secondly she has not used the work test exemption previously (noting it wasn’t available to use in prior years).
To improve Joanne’s contribution strategy, subject to any concessional contributions made in the 2018-19 financial year, she may be eligible to carry forward her unused concessional contributions from 2018-19 and make a larger concessional contribution in the 2019-207, further reducing the income tax she may pay on her capital gain.
In both instances, any contribution Joanne makes can be accessed at any time as she has reached age 65 and met a full age based condition of release for her preserved super benefits.
Example #2 – Bring-forward opportunity
Richard retired in April 2019. He had $250,000 in super on 30 June 2019 and is yet to start an account based income stream to support his retirement income needs. He turned 65 on 15 December 2019.
Richard's aunt recently passed away and he stands to inherit a commercial investment property (which he intends to retain), plus cash of $500,000. There have been some delays with the administration of his late aunt’s estate, meaning he won’t receive his portion of the cash until January 2020.
At this time, as he will have reached age 65, he would normally need to meet the work test in order to make a voluntary (in this case non-concessional) contribution to super. However, using the work test exemption he could contribute up to $300,000 as a bring-forward non-concessional anytime up to 30 June 2020.
The 2019 Federal Budget proposed a number of changes in relation to the work test including extending the age the work test applies from age 65 to age 678. In addition, the proposed measures would also increase the bring-forward age to allow individuals aged 65 and 66 to utilise this rule to make, where eligible, non-concessional contributions of up to $300,000.
Should this measure be implemented as announced, it may open the opportunity for Richard to contribute additional amounts to superannuation. For example, he could make a non-concessional contribution of $100,000 in each of the 2019-20 and 2020-21 financial years and then implement a bring-forward contribution of $300,000 in the 2021-22 financial year, before his 67th birthday in December 2021.
This would increase his total contributions to super from $300,000 initially, to the full $500,000 inherited.
Example #3 – Re-contribution strategy
Sandra turned 65 on the 15th of July 2019 after retiring from full-time work earlier in the year in April. She has accumulated $250,000 in super of which all of her benefit is taxable component.
In the event of her death, the sole beneficiary of her accumulated super will be her independent adult daughter Gemma, who is 27 years old.
As at today, Gemma would pay tax on the taxable component of her mother’s superannuation death benefit at a maximum rate of 15%9 (plus Medicare) if received directly from the super fund. On a taxable component benefit payment of $250,000, this could equate to $42,500 in tax.
As part of her retirement planning Sandra wants to minimise the potential tax payable on her super death benefits, in addition to creating an additional tax-free component in her super now, as a hedge against any future legislative change to the tax treatment of superannuation.
Sandra may choose to withdraw $250,000 from her super account and then make a $250,000 non-concessional re-contribution using the bring-forward provisions and the work test exemption. Note the consideration in the Advice Points for Example #2 above in relation to the proposed changes to the work test and bring-forward age from 1 July 2020.
Sandra would now have $250,000 in super as 100% tax-free component and would have reduced any potential death benefit tax from $42,500 to $0.
If Sandra did have additional accumulated savings outside of super, she could use this opportunity to contribute an additional $50,000 to fully utilise her $300,000 bring-forward in the 2019-20 financial year.
Similarly, any re-contribution strategy will utilise a client’s existing contribution cap, without directly increasing the amount they have in super. Where a client may have, or expect to have, additional monies they wish to contribute in the immediate future, care should be taken with a re-contribution strategy.
Where an individual also has super monies in an account based pension, the re-contributed money cannot be directly added to the existing income stream. In this instance, they would need to either start a second income stream with the re-contributed amount, or roll the account based pension back to accumulation phase and then start a new pension after combining their existing account balance with the re-contributed amount.
Keep in mind there can be additional consequences from a social security grandfathering, transfer balance cap reporting, and blending of the taxable and tax-free components within an individual’s super balance when combining the two amounts. Such consideration should be kept in mind given the particulars of the client’s own circumstances.
Example #4 – Small business CGT contribution
Sandro turned 66 in May 2019 and had accumulated $150,000 in super as at 30 June 2019.
Sandro successfully ran a small business for 25 years which he agreed to sell on 28 June 2019. Coinciding with the sale, Sandro retired in June 2019 and has not worked since.
Working with his accountant, Sandro has determined he qualifies for the small business CGT concessions and all assets sold qualified for the 15 year exemption. The business was sold for $2,000,000.
Using the work test exemption in the 2019-20 financial year, Sandro is able to make a $1,515,00010 contribution to super under the CGT cap election11 using his lifetime CGT cap.
As Sandro has not worked in the 2019-20 financial year, without the work test exemption he would be ineligible to make any voluntary contribution to super12 and would miss this opportunity entirely.
It would not be uncommon for a small business to be sold just prior to or at the end of a financial year. This has historically caused issues for individuals wishing to make super contributions where the business owner has ceased work (and therefore cease meeting the work test) before receiving the proceeds of sale in the next financial year.
For individuals with a super balance below $300,000, the work test exemption creates an opportunity to avoid this complication and potentially make a large final contribution to super before retirement.
Sandro may also choose to make an additional non-concessional contribution of up to $100,000. However, as he is age 66 on 1 July 2019 he wouldn’t be eligible to make a bring-forward contribution with the remaining proceeds from the sale of his business.
Please also note the additional consideration in the Advice Points above in relation to the proposed changes to the work test and bring-forward ages from 1 July 2020.
The work test exemption provides a new opportunity for recent retirees to potentially make additional voluntary contributions to super at a time when such contributions were previously off the table.
With the additional proposed change to increase both the work test age and the age at which an individual is eligible to trigger the bring-forward rule, additional contribution opportunities remain on the horizon for recent or soon to be retired individuals looking for one last opportunity to boost their retirement savings.
1- SIS Regulations 1994 – REG 7.04 Acceptance of contributions – regulated superannuation funds
2- SIS Regulations 1994 – REG 7.04 (1) Item 2 (b) & (1) Item 3 (b)
3- SIS Regulations 1994 – REG 7.01 (3)
4- SIS Regulations 1994 – REG 1.03 (1) “gainfully employed”
5- SIS Regulations 1994 – REG 7.04 (1) Item 2 (d) & (1) Item 3 (d)
6- ITAA 1997 – SECT 307.230
7- ITAA 1997 – SECT 291.20
8- The Hon. Josh Frydenberg MP, media release, 1 April 2019 Super boost: more flexibility for retirement
9- ITAA 1997 – SECT 302.145
10- ATO - CGT cap amount
11- ATO - Capital gains tax cap election form
12- SIS Regulations 1994 – REG 7.04 Acceptance of contributions – regulated superannuation funds
FOR ADVISER USE ONLY
This publication is current as at 15/12/19 and has been prepared by BT Financial Group , a division of Westpac Banking Corporation ABN 33 007 457 141 AFSL 233714 (“BTFG”), which is part of the Westpac group of companies (Westpac Group). This document has been prepared for the information of financial advisers only and must not be copied, used, reproduced or otherwise distributed or made available to any retail client or third party, or attributed to BTFG or any other company in the Westpac Group. The information contained in this publication is an overview or summary only and it should not be considered a comprehensive statement on any matter nor relied upon as such. This publication has been prepared without taking into account any person’s objectives, financial situation or needs. Because of this, you should, before acting on any information contained in this publication, consider its appropriateness to your clients, having regard to their objectives, financial situation or needs. Any taxation information contained in this publication is a general statement and should only be used as a guide. It does not constitute taxation advice and is based on current laws and their interpretation. Each individual client’s situation may differ, and your clients should seek independent professional taxation advice on any taxation matters. Any graph, case study or example contained in this publication is for illustrative purposes only, and is not to be construed as an indication or prediction of future performance or results. While the information contained in this publication may contain or be based on information obtained from sources believed to be reliable, it may not have been independently verified. Where information contained in this publication contains material provided directly by third parties it is given in good faith and has been derived from sources believed to be accurate at its issue date. It is not the intention of BTFG or any member of the Westpac Group that this publication be used as the primary source of readers’ information but as an adjunct to their own resources and training. To the maximum extent permitted by law: (a) no guarantee, representation or warranty is given that any information or advice in this publication is complete, accurate, up to date or fit for any purpose; and (b) no member of the Westpac Group is in any way liable to you (including for negligence) in respect of any reliance upon such information.
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