How does the exemption work?
From 1 July 2019, certain individuals aged 65 to 74 can make voluntary contributions to superannuation for 12 months from the end of the financial year in which they last met the work test.
In order to qualify for the work test exemption, they must have a total superannuation balance below $300,000 at the previous 30 June. If a member’s total superannuation balance increases above the $300,000 threshold following this date, the member still qualifies for the exemption as the only date at which the individual’s total superannuation balance is tested is the one immediately before the start of the financial year that the contributions are made. For instance, if a member has less than $300,000 at 30 June 2020 and a large contribution that takes the member’s total superannuation balance over $300,000 is made in August 2020, the ability to use the work test exemption in the 2020-21 year is not affected as the increase in balance occurs after 30 June 2020.
Another thing to be mindful of is that this exemption is only available in relation to one financial year, meaning retired individuals who return to work and meet the work test in future financial years, would not re-qualify for this exemption. Once a member used the work test exemption in one financial year, they cannot use it again in any future financial years. The explanatory statement that accompanied the work test exemption regulations specifies that the reason behind this measure is to ensure the change does not incentivise individuals to make a brief return to work in order to contribute more money to superannuation than they would otherwise be entitled to. This would, however, not preclude such an individual from returning to work and making contributions for the year in which they satisfy the work test (as may occur under the current law).
The annual concessional and nonconcessional caps (currently, $25,000 and $100,000 respectively) will continue to apply under the work test exemption. Eligible individuals will also be able to access any unused portion of their concessional contributions cap and contribute more than $25,000 under the existing carry-forward rules during the 12 months.
The concept behind the work test exemption is to allow recent retirees with small super balances to make voluntary contributions one extra year after they last met the work test so they can boost their super balances.
This is achieved by allowing superannuation funds to accept such contributions made in respect of members that satisfied the work test in the previous financial year, rather than satisfying the work test in the financial year in which the contributions are made. Without the work test exemption, such members would be prevented from making voluntary contributions to super unless they meet the work test in the year they wish to contribute.
At this point, it is important to note that those who stopped working well before age 65 will not qualify for the work test exemption from 1 July 2019 as it is only possible to use this exemption after the year in which the work test was met. As the 2019-20 is the first year the work test exemption applies, those using this exemption in that first year would need to meet the work test in 2018-19.
Let’s take a look at an example to demonstrate how the new exemption to the work test works in practice.
John turns 68 in June 2020 when he plans to retire from full-time work. He intends to sell his investment property in August 2020 and use the work test exemption to contribute part of the sale proceeds to super (up to his available contribution caps) in 2020-21 year.
John confirms that:
- He was gainfully employed during the 2019-20 financial year and therefore satisfied the work test for that year.
- His total superannuation balance was under $300,000 immediately before the year he wants to contribute (30 June 2020 in this case).
- He has not used the work test exemption previously.
As John qualifies for the work test exemption for the following financial year (2020-21), he can make personal super contributions during the 2020 - 21 year despite the fact he will not have worked at all during that year. After that one exemption use, however, John would be unable to use this exemption in any subsequent years.
Work Test Exemption Administration
The work test exemption is required to be administered by superannuation funds rather than the ATO, meaning this measure would require funds to request information from members that would allow the fund to assess whether a member has previously qualified for the exemption. This approach is similar to how an SMSF member declaration is used to confirm the work test has been met.
The funds would also need to request information from members that would allow the fund to assess whether a member has a total superannuation balance below $300,000 on the 30 June of the previous financial year. This is because a particular superannuation fund will not be in a position to independently determine whether a member’s total superannuation balance is under the $300,000 threshold because the fund will not have oversight of an individual’s superannuation interests held in other funds.
Consequently, the new measure is likely to increase the administrative burden on both trustees and the ATO in relation to monitoring the maximum balance restrictions to access this exemption.
1. The contribution measure to scrap the work test for people aged 65 and 66 announced in the 2019 Federal Budget may lead to confusion
In this year’s Federal Budget, the government proposed to remove the work test for people aged 65 and 66 and extend access to the bring forward arrangements for non-concessional contributions for the same group from 1 July 2020.
This new change may cause confusion among SMSF trustees and lead to errors due to the new proposal appearing similar to the work test exemption that is currently legislated to commence from 1 July 2019.
To avoid compliance errors occurring, it is important to note here that the work test exemption is linked to the last year of employment whereas this year’s budget contribution measure is just an age-driven change.
That being said, should this proposed change be introduced, this would present some new opportunities for those who are not working but still wish to contribute to their super fund(s) from the middle of next year. At the moment, however, this is just a proposal. Thus, it will be prudent to wait to see if this measure is passed into law before acting on it.
2. Work test exemption interacting with the bring-forward rules
The exposure draft legislation associated with the work test exemption included a proposal to change the current eligibility criteria for accessing the bring forward arrangements for non-concessional contributions so as to complement the changes to superannuation contribution acceptance rules.
Following the consultation process on the draft legislation, the government has decided not to proceed with its initial proposal to change these bring forward arrangements.
This in effect means that from 1 July 2019, a member who is eligible to access the first year of the bring forward nonconcessional contributions cap is allowed to use the work test exemption in the year they turn 65 to trigger these bring forward rules. So, rather than being excluded by complex legislation (as initially proposed), such members could make non-concessional contributions for a financial year without satisfying the work test in that year (providing
the work test was met in the immediately preceding year and all the other work test exemption requirements have been satisfied).
“The concept behind the work test exemption is to allow recent retirees with small super balances to make voluntary contributions one extra year after they last met the work test so they can boost their super balances.”
Q&A - Work test exemption
Q1. I turn 65 in August 2020 and intend to retire from full time employment in June 2020. Having not used the work test exemption in any previous financial year, can I use this exemption in the following year (2020-21) to trigger the bring forward provisions for non-concessional contributions? I have a total superannuation balance of about $200,000 on 30 June 2020 and do not intend to work at all during the year I turn 65 (2020-21).
A. You can use the work test exemption in the 2020-21 year to access bring forward arrangements as you:
- are under 65 at the start of the 2020-21 year (that is, at 1 July 2020)
- met the work test of 40 hours in 30 consecutive days in the previous year (2019-20)
- have a total superannuation balance of less than 300,000 on 30 June 2020
- have not used the work test exemption previously.
Q2. I am 66 years old and intend to continue working full time until the end of September 2021. As I satisfy the work test in the 2021-22 year, I intend making personal super contributions in that year. My total superannuation balance will be less than $300,000 at the end of that year (30 June 2022) and I could use the work test exemption in the following year (2022-23) to make future personal contributions to super. Can I use the work test exemption again in future financial years?
A. You can only use this exemption in one financial year. If you use it in 2022-23, the work test exemption would be unavailable to you in future financial years and you would need to meet the work test in the year you wish to make additional voluntary contributions.
Q3. I plan to retire from full time work in May 2020 when I turn 67. I have less than $150,000 in super and do not intend to go back to work after retiring. Would I be able to use the work test exemption in any subsequent years to make voluntary contributions?
A. If you retire permanently in May 2020, you could only use the work test exemption in the following financial year (2020-21).
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