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.
Individuals aged between 671 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 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 conditions2 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 67 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’.3
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.4
Gainfully employed is defined as being employed or self-employed for gain or reward in any business, trade, profession, vocation, calling, occupation or employment.5
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 satisfied6:
- 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 balance7 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 ability 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 2020-21 financial year resulting in a taxable capital gain of $250,000. Joanne had $290,000 in super on 30 June 2020.
Joanne was previously a self-employed freelance writer and has had sporadic work patterns over the last 5 years. She did not work more than an hour or two a week (i.e. did not meet the work test) during the 2017-18 or 2018-19 financial years, however as a result of a full time contract during August 2019, she did meet the work test within the 2019-20 financial year.
Whilst Joanne is not eligible to make a bring-forward contribution in the 2020-21 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 to reduce her taxable income, due to the capital gain from the sale of her investment property.
While Joanne did not meet the work test for several 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 prior to 1 July 2019).
To improve Joanne’s contribution strategy, subject to any concessional contributions made in the 2018-19 and 2019-20 financial years, she may also be eligible to carry forward her unused concessional contributions from 2018-19 and 2019-20 and make a larger concessional contribution in 2020-218, 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 – Re-contribution strategy
Sandra turned 67 on the 15th of July 2020 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 are 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 Sandra’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 death benefits tax.
As part of her retirement planning Sandra wants to minimise the potential death benefits tax payable on her super monies, 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 elect to withdraw $100,000 from her super account and then make a $100,000 non-concessional re-contribution using the work test exemption.
Sandra’s super benefits would now comprise of$100,000 as a tax-free component, meaning any potential death benefits tax would reduce from $42,500 to $25,500 (including Medicare Levy).
Any re-contribution strategy means utilising an individual's existing contribution cap, without directly increasing the amount they have in super. Where a person may have, or expect to have, additional monies they wish to contribute in the immediate future, care should be taken with incorporating a re-contribution strategy.
Where an individual also has super monies in an account-based pension, the re-contributed amount cannot be directly added to their 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 restart a new pension after combining their existing pension monies with the newly re-contributed amount.
It should also be noted that there can be additional consequences, such as the loss of social security grandfathering, transfer balance cap reporting, and mixing the taxable and tax-free components within an individual’s super balance, when combining these two amounts. Consideration should be given to the particulars of an individuals personal circumstances.
Example #3 – Small business CGT contribution
Sandro turned 68 in May 2020 and had accumulated $150,000 in super as at 30 June 2020.
He successfully ran a small business for 25 years which he agreed to sell on 28 June 2020. Coinciding with the sale, Sandro retired in June 2020 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 2020-21 financial year, Sandro is able to make a $1,565,00011 contribution to super under the CGT cap election12 using his lifetime CGT cap.
As he has not worked in the 2020-21 financial year, without the work test exemption he would be ineligible to make any voluntary contributions to super13 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 ceased 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.
In this example, Sandro may also choose to make an additional non-concessional contribution of up to $100,000. However, as he is age 68 on 1 July 2020 he wouldn’t be eligible to make a bring-forward contribution with the remaining proceeds resulting from the sale of his business.
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 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 For those age 65-74, the ‘work test exemption’ also applied during the 2019/20 financial year
2 SIS Regulations 1994 – REG 7.04 Acceptance of contributions – regulated superannuation funds (here)
3 SIS Regulations 1994 – REG 7.04 (1) Item 2 (b) & (1) Item 3 (b) (here)
4 SIS Regulations 1994 – REG 7.01 (3) (here)
5 SIS Regulations 1994 – REG 1.03 (1) “gainfully employed” (here)
6 SIS Regulations 1994 – REG 7.04 (1) Item 2 (d) & (1) Item 3 (d) (here)
7 ITAA 1997 – SECT 307.230 (here)
8 ITAA 1997 – SECT 291.20 (here)
9 ITAA 1997 – SECT 302.145 (here)
10 ATO - CGT cap amount (here)
11 ATO - Capital gains tax cap election form (here)
12 SIS Regulations 1994 – REG 7.04 Acceptance of contributions – regulated superannuation funds (here)
FOR ADVISER USE ONLY
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