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 personal deductible 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 personal deductible 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 by the individual to enable them to claim a deduction for a personal contribution.
Generally, to claim a deduction for a personal contribution, if a member is between the ages of 67 and 74 (inclusive) they ‘…must have been gainfully employed for at least 40 hours in any period of 30 consecutive days during the financial year in which the contribution was made’.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.5
The work test exemption
There are additional contribution eligibility criteria that 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 personal deductible 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.
Personal deductible contributions are personal contributions an individual makes to super, which they then claim as a tax deduction in their income tax return. Certain eligibility criteria must be met, which includes the individual’s level of taxable income, their concessional contributions cap space and the submission of required paperwork, within the required timeframes, to the trustee of their super fund to ensure the deduction can be claimed.
Example #1 - Sale of an asset
Joanne is 70 years old, retired, and has recently sold an investment property in the 2022-23 financial year resulting in a taxable capital gain of $250,000. Joanne had $290,000 in super on 30 June 2022.
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) between the 2017-18, to the 2020-21 financial years, however as a result of a full time contract during August 2021, she did meet the work test within the 2021-22 financial year.
Whilst Joanne is eligible to make a bring-forward contribution in the 2022-23 financial to contribute up to $330,000 as a non-concessional contribution to super, she may also consider making a $27,500 concessional contribution and using her carry forward concessional caps, and then claim a tax deduction for this 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 in the earlier financial years and 67 from 1 July 2020, 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 2018-19,2019-20, 2020-21 and 2021-22 financial years, she may also be eligible to carry forward her unused concessional contributions from 2018-19,2019-20, 2020-21 and 2021-22 and make a larger concessional contribution in 2022-23, 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.
The work test exemption provides an opportunity for recent retirees to potentially make personal deductible contributions to super at a time when such contributions were previously off the table.
The age at which an individual is eligible to trigger the bring-forward rule has also been increased to those who are 74 or younger as at 1 July in a given financial year. The work test requirements have also been removed for other types of personal contributions for those between age 67 and 74. As a result, additional contribution opportunities have been made available for older Australians looking to boost their retirement savings.
1 For those age 65-74, the ‘work test exemption’ also applied during the 2019/20 financial year
2 ITAA 97 – SECT 290.165 (1A) (here)
3 ITAA 97 – SECT 290.165 (1A) (a) (here)
4 ITAA 97 – SECT 995.1 (1) “gainfully employed” (here)
5 ITAA 1997 – SECT 290.165 (1A) (b) (here)
FOR ADVISER USE ONLY
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