In the 2018 May Budget, the Government announced the proposal to allow individuals who are recent retirees and who have attained age 65, to make last chance voluntary contributions by providing a one year exemption from the work test.  This proposal will apply from 1 July 2019 to the 2019/20 and subsequent financial years.  As draft legislation to implement the proposal has now been released (2nd October 2018), it is possible to consider the proposal in detail.

What is the “work test”?

The work test applies to individuals who have attained age 65 but who are less than age 74.  The work test applies to member contributions (ie contributions other than those made by an employer of the individual) and to voluntary employer contributions (ie contributions made by an employer of the individual other than contributions the employer is required to make because of an industrial award or agreement or to satisfy the employer’s super guarantee obligations).  The work test applies separately to each financial year (so that for the super fund to accept contributions in respect of the 2019/20 financial year, the individual must have satisfied the work test in the 2019/20 financial year; it is not sufficient to have satisfied the work test in the 2018/19 financial year.   The work test does not apply to mandatory employer contributions and it also does not apply to “downsizer contributions”.

The work test is that for a superannuation fund to accept the contributions the individual must have been gainfully employed, at least on a part-time basis, in respect of the financial year in which the contribution is made.  This is defined to mean gainfully employed for at least 40 hours in a period of at most 30 consecutive days (there is another similar definition of “part-time gainful employment” but this definition is used to determine whether an individual is retired for the purposes of accessing their benefits).  Once an individual has attained age 75 contributions generally (subject to a grace period) cannot be accepted in respect of the individual.   The grace period runs from the date the individual attains age 75 and ends 28 days after the month in which the individual attained age 75.

What is the work test exemption?

The exemption is that in respect of the first financial year in which the individual does not satisfy the work test, the individual can make member contributions up to their non-concessional contributions cap (currently $100,000) and also member contributions up to their concessional contributions cap (currently $25,000).

There are a number of preconditions for making work test exempt contributions which must all be satisfied.

First, the individual must have satisfied the work test in respect of the financial year immediately preceding the financial year in which the contribution is made.

Second, the total superannuation balance of the individual immediately before the start of the financial year in which the contributions are made must be less than $300,000.   In determining the total superannuation balance, the withdrawal value of any account-based or account-like income streams must be used.

Lastly, no work test exempt contributions must have been made in respect of the individual in respect of a previous financial year (whether to a superannuation fund or to a retirement savings account).

Examples of work test exempt contributions

Example 1

Bill attains age 65 on 1 November 2020.  He has worked full time until attaining age 65 so that for the 2020/21 financial year Bill satisfies the work test.

Any contributions made in respect of Bill before 1 November 2020 are not subject to the work test.

Any contributions made in respect of Bill in the period 2 November 2020 to 30 June 2021 are not work test exempt contributions (as he has satisfied the work test in respect of the financial year in which they are made).

Bill makes a $30,000 non-concessional contribution on 5 July 2021.  Bill does not work at all during the 2021/22 financial year.  On 30 June 2021, Bill’s total superannuation balance was $289,000. 

In this situation, Bill has not satisfied the work test in respect of 2021/22 (the contribution year) but did satisfy the work test in respect of 2020/21 (the immediately preceding financial year) and his total superannuation balance was less than $300,000 immediately before the contribution year.  Consequently the $30,000 contribution will be treated as work test exempt contribution.

Bill subsequently contributes $45,000 on 1 June 2022.  These subsequent contributions will also qualify as work test exempt contributions as Bill has not satisfied the work test in respect of the contribution year but did satisfy the work test in respect of the immediately preceding financial year.  Further, though Bill’s total superannuation balance at 1 June 2022 is about $319,000, this does not matter.  The relevant value of the total superannuation balance is the balance on 30 June 2021 (ie immediately before the contribution year).

Bill then makes a $15,000 contribution on 5 July 2022.  This contribution is not a work test exempt contribution for a number of reasons.  First, while Bill does not satisfy the work test in respect of 2022/23 he also did not satisfy the work test in respect of the immediately preceding financial year (2021/22).  Secondly, Bill’s total superannuation balance immediately before the start of the 2022/23 financial year is in excess of $300,000.  Thirdly, contributions made in 2022/23 cannot qualify as work test exempt contributions as he has already made work test exempt contributions in respect of a previous financial year.

Can the unused contribution cap space be carried forward?

In short, no.  Continuing from Example 1, Bill made $75,000 (first $30,000 on 5 July 2021 and then $45,000 on 1 June 2022) of non-concessional contributions in 2021/22, he cannot carry forward the unused cap space of $25,000 to a later year.

This is because all contributions which are to qualify as work test exempt contributions must be made in a single financial year.

Is it possible to use the work test exemption a second time?

In short, no.  It is a once only opportunity.  Bill (or for that matter any other eligible individual) cannot have a second go at making work test exempt contributions.

Is the amount of work test exempt contributions limited to the short fall between the total superannuation balance and $300,000?

In short, no.  Even if Bill’s total superannuation balance was under the $300,000 limit just by a few dollars (say $10) immediately before the start of the contribution year, he could still make up to $100,000 of non-concessional contributions and up to $25,000 of concessional contributions. 

The amount of work test exempt contributions is not limited to the shortfall between the total superannuation balance and $300,000.

How can concessional contributions be work test exempt contributions?

Work test exempt contributions can be both non-concessional and concessional contributions.  If the individual’s circumstances permit, they could make $125,000 of work test exempt contributions. 

Concessional contributions can be made by an individual for themselves.  However, if an individual wishes to make $25,000 of concessional contributions, then the individual must have at least $25,000 of taxable income.  Concessional contributions are contributions in respect of which the individual making the contributions is entitled to claim a tax deduction.

There is no requirement that only an employer can make concessional contributions.  Further, there is no requirement that concessional contributions can only be made from salary.  As long as Bill has taxable income of $25,000 (from, say, investments) he can make $25,000 of concessional contributions.

Can the work test exemption still apply if the work test was satisfied many years ago?

Again in short, no.  The work test must be satisfied in the financial year immediately preceding the financial year in which the contribution is made.

Continuing with Bill, if Bill last satisfied the work test in financial year 1, he can (so long as he has not attained age 75) make work test exempt contributions in financial year 2 (assuming the other requirements have been satisfied).

If Bill satisfied the work test in financial year 1, but made no contributions in financial year 2, Bill could not make work test exempt contributions in financial year 3 (as the immediately preceding financial year is not a year in respect of which Bill satisfied the work test).

However, if Bill in financial year 3 satisfied the work test then Bill could make work test exempt contributions in financial year 4 (assuming he has never made work test exempt contributions before).

Can the work test exemption apply after age 75?

In general, no.  However, the current contribution acceptance rules provide a grace period in which contributions made after age 75 can be received.  This grace period ends 28 days after the end of the month in which the member attains age 75. 

Work test exempt contributions could be made during the grace period.

Can work test exempt contributions be made over two consecutive financial years?

In short, no.  Any contributions which are to qualify as work test exempt contributions must be made within a single financial year.

What happens if Bill makes $125,000 of contributions thinking that $25,000 of those contributions can be concessional contributions but only $10,000 are treated as concessional contributions?

This situation could happen if Bill’s taxable income (before claiming a tax deduction for the contribution) for the contribution year is $10,000 and not $25,000. 

Bill makes the $125,000 contribution and advises the superannuation fund that $25,000 is a deductible contribution.

As a contribution is only a concessional contribution if the maker of the contribution (in this case Bill) can claim a tax deduction for the contribution, if Bill’s tax deduction is limited to $10,000 (because that is his taxable income for the contribution year) then the excess of $15,000 will be treated as a non-concessional contribution.

In this situation the superannuation fund can treat the $100,000 non-concessional contribution and the $10,000 concessional contributions as work test exempt contributions.  However, the $15,000 non-concessional contribution will be treated as an excess non-concessional contribution.

What happens if the work test exemption does not apply?

In this situation, to the extent the contributions do not qualify as work test exempt contributions, they will be treated as non-concessional contributions (or concessional contributions if a valid contribution deduction election has been made).

Since the contributions have been made after the relevant member has attained age 65 where the work test is not satisfied, the contributions must be repaid by the superannuation fund as they have been accepted in breach of the contribution acceptance rules.  To the extent the contributions have been accepted in breach of the contribution acceptance rules, the superannuation fund must repay them within 30 days of the superannuation fund becoming aware of the breach of the contributions acceptance rules.

To the extent the contributions were made in breach of the contribution acceptance rules the contributions cannot qualify as excess contributions.

What is the interaction between work test exempt contributions and the “bring forward” of non-concessional contributions?

The draft legislation provides that work test exempt contributions are disregarded for the purposes of determining whether the individual has triggered the application of the “bring forward” rule by which up to three years’ worth of non-concessional contributions could be made within a period of up to three years.

But for the disregarding of work test exempt contributions, in limited circumstances, where the individual attains age 65 during the course of a financial year in which they are eligible to make work text exempt contributions, the work test exempt contributions could trigger the application of the “bring forward” rule.