What you need to know about the new work test exemption

Article from our Outlook magazine, published July 2019


By Gabriela Rusu

"If used correctly, the new work test exemption can give recent retirees an extra chance to boost their super savings."

The work test exemption is due to start from 1 July this year, after first being proposed in the 2018 Federal Budget and recently legislated. It means certain recent retirees wanting to make super contributions can get a one-year exemption from the work test. However, there are specific conditions that super fund members and their advisers will need to meet to ensure they use the work test exemption correctly.

 ​The Current Rules

In 2018-19, individuals aged 65 or over (but under the age of 75) are required to satisfy a ‘work test’ in order to make voluntary contributions to superannuation (unless the contribution is a downsizer contribution from the sale proceeds of an individual’s main residence).

Such voluntary contributions include personal super contributions (i.e. nonconcessional contributions and personal deductible contributions) and voluntary employer contributions, such as salary sacrifice. The work test does not apply to mandatory employer contributions, such as super guarantee contributions or those made by an employer to satisfy an industrial award as contributions that are mandated can be made at any time without a work test.

The work test that applies to voluntary contributions requires the individual to have been gainfully employed for at least 40 hours in any 30-day period in the year a contribution is made. For example, a gainfully employed person who works a minimum 40 hours in a month at some point during the year will pass this test and, consequently, can make contributions for the rest of the financial year.

To be ‘gainfully employed’ a person must either be employed or self-employed for gain or reward in any business, trade, profession, vocation, calling or occupation or employment.

The definition of ‘gain and reward’ is particularly broad and does not limit itself to salary or wages. It includes business income, bonuses, commissions and fees or gratuities in return for personal exertion. This in effect means that the individual must have worked in return for something tangible. This can include farming, gardening, babysitting, cleaning, consulting and any other paid employment.

Given the work test requires an individual to be remunerated for their efforts, this rules out volunteer work. Thus, because unpaid volunteer work does not meet the definition of ‘gainful employment’, a member who works unremunerated for a charity cannot contribute once they turn 65 (unless the contribution is a downsizer contribution).

If the contribution is made to an industry or retail fund, the person making the contribution is generally required to tick a box that states that the work test has been satisfied. In the case where the contribution is made to an SMSF, a Work Test Declaration would typically suffice as proof the work test has been passed. It is, however, essential to retain evidence of the work performed because there is always the risk of being asked (in the event of an ATO audit) to provide appropriate evidence that the work test has been met. If the ATO is not satisfied with the evidence provided, the contribution is likely to be disallowed. Individuals who would like specific advice on how the rules apply to their personal circumstances can apply for a private ruling from the ATO to determine whether or not they meet the work test.

Individuals over 65 meeting the work test can make voluntary contributions to superannuation any time from the age of 65 until the 28th day of the month following the member’s 75th birthday. For example, if someone turns 75 in April this year, they can make a voluntary contribution to super up until 29 May 2019. This is a special rule that applies around an individual’s 75th birthday. After that time, only contributions that are mandated employer contributions can be made.

Currently, certain individuals aged less than 65 may bring forward up to three times the annual non-concessional contributions cap in a financial year, depending on their total superannuation balance immediately before the start of the financial year the contribution is made (that is, at the previous 30 June). An individual’s total superannuation balance is essentially the total of different values for each of their superannuation interest(s) in all of their super fund accounts.

The final year in which an individual can trigger these bring forward rules is the year in that they turn 65. Once the member turns 65, they can only make a non-concessional contribution if they satisfy the work test in the financial year in which the contribution is made. The main issue here revolves around the individual turning 65. Take for instance an individual who turns 65 on 1 May 2019. If a voluntary contribution is made to their superannuation fund prior to their 65th birthday (before 1 May 2019 in this case), they are not required to meet the work test because members under 65 do not have to satisfy the work test to make these contributions. If, on the other hand, the contribution is made after they turn 65 (that is after 1 May 2019), they must meet the work test in the 2018-19 financial year before the voluntary contribution can be made.

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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.

Example

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.

Other Considerations

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).

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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