Reaching the age of 65 is a milestone for some of us, but it also makes getting money into super more difficult. A recent change to the super contribution rules will help some Australians to top-up their retirement savings through an exemption from the super work test.
The work test exemption applies from 1 July 2019. Australians aged 65 to 74 with a total super balance below $300,000 are able to make voluntary contributions for an additional financial year, following the one in which they last met the work test.
Our super system imposes rules around who can make voluntary super contributions.
Contribution rules – Pre-1 July 2019
Any Australian aged under 65 can contribute money to super, whether they are working or not.
Between the ages of 65 and 74 you can only contribute if you meet the ‘work test’ in the financial year in which the contribution is made.
After age 75 you cannot make voluntary contributions to super, but if you’re still working, your employer can make compulsory super guarantee payments.
What is the work test?
For a person between 65 and 74 to meet the work test, they must have been ‘gainfully employed’ for at least 40 hours in a period of not more than 30 consecutive days in the financial year. The 40 hours can be in any arrangement over the 30 consecutive days.
Gainfully employed means you are employed or self-employed and getting paid for it. The employment arrangement needs to be fully documented and declared for income tax purposes. Volunteer or charity work does not qualify as gainful employment, as you are not being paid for it. The work test can be satisfied anywhere in the world.
The work test does not apply to downsizer and compulsory employer contributions.
Work test exemption – From 1 July 2019
A new one-year exemption from the work test applies for some retirees.
From 1 July 2019, Australians aged 65 to 74 with a total super balance below $300,000 as at the previous 30 June, will be able to make voluntary contributions for 12 months from the end of the financial year in which they last met the work test. This is known as the work test exemption. Say you’re 66 and retire this financial year (2019-2020). You can still contribute next financial year (2021-2022) despite not working next year.
The work test exemption can be used in one financial year only. This means if you use the exemption to make a super contribution, and then return to work, you can’t use it again when you retire at a later date. It’s important to make best use of the exemption, as there won’t be a second opportunity.
In terms of the amount of money that could be contributed, the existing caps continue to apply – $25,000 for concessional contributions, and $100,000 for non-concessional contributions. If you’re under 65 at any time during the financial year, you can use the bring forward provision to make non-concessional contributions up to $300,000.
How will this change help retirees?
Many people currently nearing retirement have not had a complete career of compulsory super contributions from their employers. Super only became compulsory in 1992. At that time, compulsory contributions were just 3% of wages, taking a decade to rise to 9%, then to the current rate of 9.5%. Under a schedule enacted by law, the super guarantee will rise gradually until it reaches 12% in 2025.
For people approaching retirement with lower super balances, the work test exemption will give additional flexibility to contribute more into super as they move into retirement.
The work test exemption provides a number of planning opportunities for people with lower super balances. One of these is the deferral of asset sales to achieve a more favourable tax outcome.
Deferring asset sales to the financial year following retirement
As you approach retirement, you might consider selling assets held outside of super and contributing the proceeds to your super to maximise retirement savings.
From a tax perspective, it can be better to wait until the financial year after retirement to sell assets, as your marginal tax rate may be much lower (because there is no employment or business income), minimising the tax paid on assessable capital gains.
With the introduction of the work test exemption, you can consider waiting until the financial year following retirement to sell non-super assets and still be able to contribute the proceeds into super.
To discuss how the work test exemption might apply to you call us on 1300 623 936 or email email@example.com.
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