This article explores the new work test exemption rules, as well as the tips and traps that need to be considered by a range of eligible clients.

From 1 July 2019, recent retirees aged 65 to 74 with total superannuation balances below $300,000 will be eligible to make voluntary contributions for an additional financial year. This article explores the new work test exemption rules, as well as tips and traps that need to be considered by a range of eligible clients.

Existing contribution rules

Under current legislation, for a client aged 65 to 74 to be eligible to a make a voluntary superannuation contribution, they must have already satisfied the work test during the financial year that the contribution is made.

The work test is satisfied where a client has been gainfully employed for 40 hours in a period of 30 consecutive days during the financial year.

Voluntary contributions are all contributions other than employer contributions required under Super Guarantee law or an industrial award or agreement (i.e. mandated employer contributions).

Note: In the 2019 Federal Budget, the Government announced a number of proposals related to the work test, including:

– removing the work test for voluntary contributions for people aged 65 and 66;

– extending the ability for members age 65 and 66 to utilise the bring forward rules to make non-concessional contributions of up to $300,000; and

– an increase to the age limit for spouse contributions, from 69 to 74.

However, given these changes are not proposed to take effect until 1 July 2020 and their implementation will depend on the outcome of the next federal election, they have been ignored for the purposes of this article.

Work test exemption eligibility

The work test exemption is intended to give people with low superannuation balances more time to make contributions to superannuation after they have retired.

The exemption was originally proposed in the 2018 Federal Budget. After releasing draft regulations for consultation, the Government made final regulations on 6 December 2018 implementing this measure.

Under the work test exemption, from 1 July 2019, clients aged 65 to 74 who cannot make voluntary contributions under the existing rules (due to not meeting the work test), can make voluntary contributions using the work test exemption if:

– they met the work test (40 hours of gainful employment in a 30 consecutive day period) in the previous financial year; and

– their total superannuation balance at the end of the previous year is less than $300,000; and

– they have not made use of the work test exemption in a previous financial year.

Example 1: Using the work text exemption

Carla is aged 69 on 1 September 2019 and wishes to make a non-concessional contribution of $100,000 to her superannuation fund. While she hasn’t been gainfully employed during the 2019-20 financial year, she retired from full-time work in March 2019 and had therefore met the required work test in the 2018-19 financial year. Her total superannuation balance at 30 June 2019 was $260,000.

As a result, Carla is able to rely on the work test exemption to make up to $100,000 in non-concessional contributions during the 2019-20 financial year.

Important points to note:

– Once in a lifetime exemption – the work test exemption can only be used in one financial year. This prevents clients from using the exemption, then meeting the work test and using the exemption again in a later financial year. This means it’s important to make best use of the exemption, as the client won’t get another opportunity.

– As the exemption is only available for clients aged 65 to 74 who meet the work test in the previous financial year, the exemption is only available for those who cease work for the last time on or after age 64. Clients who ceased work for the last time at an earlier age will not be able to utilise the exemption.

– Only available to clients with relatively low superannuation balances. As the total super balance must be below $300,000 at the end of the previous financial year, it limits the number of clients who will be able to utilise this measure. However, it may be an opportunity to equalise superannuation balances for members of a couple where one partner has a lower superannuation balance.

– The work test exemption does not permit contributions to be made when the client would not otherwise be eligible due to their age. For example, spouse contributions cannot be made in respect of a spouse who is age 70 or over, and other voluntary contributions cannot be made once a client has reached age 75.

– Clients using the work test exemption are able to make any type of voluntary contribution including concessional and non-concessional. This means they may have access to:

– A concessional cap of $25,000, or a higher amount due to the carry forward of unused concessional cap amounts since the 2018-19 financial year (carry forward amounts are also limited to the five previous financial years).

– A lifetime CGT cap of $1.48 million (2018-19).

– Contributions arising from structured settlements or orders for personal injuries (no cap).

– Bring forward rule for non-concessional contributions. See below for more information.

Bring forward rule

In the Government’s initial draft regulations, the non-concessional contributions cap rules were proposed to be modified, so that a client could not trigger the bring forward rule when relying on the work test exemption.

However, this proposal was removed from the final regulations, so normal contributions cap rules apply to clients using the work test exemption.

This means that clients can trigger the bring forward rule after their 65th birthday in the year they reach age 65 where they do not meet the work test in that year, provided they satisfy the work test exemption criteria.

Example 2: Triggering bring forward rule using work test exemption

Colin retired from full-time work in March 2019 and used up his general non-concessional cap of $100,000 in the 2018-19 financial year. His total superannuation balance at 30 June 2019 is $250,000. He reaches age 65 on 2 August 2019.

Colin has an investment property that he plans to sell for $500,000 and wants to maximise his superannuation. Under existing voluntary contribution rules, Colin needs to make any contributions in the 2019-20 financial year prior to his 65th birthday, which will involve having to receive settlement proceeds very early in the 2019-20 financial year by likely having already exchanged contracts on his property well before the end of the 2018-19 financial year.

An exchange of contracts in the 2018-19 financial year means that any assessable capital gain will be taxable to Colin in the 2018-19 financial year when his marginal tax rate is relatively higher (due to employment income received in the 2018-19 financial year).

With the introduction of the work test exemption, Colin will be eligible to make voluntary contributions throughout the 2019-20 financial year. He can therefore wait until early in the 2019-20 financial year to sell his property (potentially minimising any tax on assessable capital gain due to no employment income and his tax rate being potentially lower), and then has the remainder of the 2019-20 financial year to make a non-concessional contribution of $300,000 under the bring forward rule.

Tips and traps

The work test exemption provides a number of important planning opportunities for clients with low superannuation balances.

TIP: Extra contributions when selling an investment property close to retirement

Under existing rules, where a client who is already age 65 at the start of the financial year is retiring and selling an investment property to help fund their retirement savings, they are limited to a non-concessional cap of $100,000 and concessional cap of $25,000.

With the introduction of the work test exemption, eligible clients who have not triggered an existing bring forward period can put at least an additional $100,000 of sale proceeds into their super fund. Those who have triggered an existing bring forward period may be able to contribute a higher amount.

Example 3: Contributing investment property sale proceeds

Stephanie (age 72) winds up her business and retires on 1 January 2019. She then sells an investment property for $450,000 a month later. She makes a non-concessional contribution of $100,000 and a personal concessional contribution of $25,000 in the 2018-19 financial year.

At 30 June 2019, her total super balance is $240,000. Stephanie can therefore make use of the work test exemption to make a further $100,000 non-concessional contribution in the 2019-20 financial year.

Depending on whether she has other assessable income during the 2019-20 financial year and her marginal tax rate, she may also consider making a personal concessional contribution during the 2019-20 financial year.

Note: If instead, Stephanie’s investment property had been her main residence at some time for CGT purposes and had been owned for 10 years or more, she could also consider contributing the proceeds under the $300,000 downsizer contribution rules.

TIP: Deferring asset sales to the financial year following retirement

Under existing rules, where a client who is already age 65 at the start of the financial year is retiring, they may wish to sell assets held outside super and make use of the non-concessional and concessional contributions caps to maximise their retirement savings.

However, from a tax perspective, it can often be much more favourable to wait until the financial year after retirement to sell assets, as the client’s marginal tax rate may be much lower (due to no employment or business income), minimising the tax paid on any assessable capital gains.

With the introduction of the work test exemption, eligible clients can consider waiting until the financial year following retirement to sell their non-super assets and still be able to contribute the proceeds into superannuation.

Example 4: Contributing sale proceeds in the financial year after retirement

Boris (age 68) retires on 1 May 2019 having received a salary of $100,000 during the 2018-19 financial year. He has a portfolio of listed shares valued at $100,000, which have been held for many years and have an unrealised capital gain of $60,000.

Without the work test exemption, if Boris wanted to maximise his superannuation balance by contributing the proceeds from his share portfolio, he would need to sell his share portfolio during the 2018-19 financial year. This would allow him to make a personal concessional contribution of $15,500 (the concessional cap remaining after the Super Guarantee) and a $78,627 non-concessional contribution – the remaining $5,873 sale proceeds would be used to pay the increased tax and Medicare levy liability due to the capital gain after allowing for the tax-deduction for the contribution.

The total tax and Medicare levy liability associated with the sale of the share portfolio in this case is $8,198 ($5,873 + $15,500 x .15).

With the work test exemption (assuming his total super balance at 30 June 2019 is less than $300,000), Boris could instead sell his share portfolio at the start of the 2019-20 financial year. This would allow him to make a $100,000 non-concessional contribution. As Boris’s total assessable income for the 2019-20 financial year consists only of the $30,000 assessable capital gain, he pays no income tax during the 2019-20 financial year.

Boris therefore saves almost $8,200 in tax and Medicare levy by delaying the sale of shares and using the work test exemption.

In this example, it is assumed that Boris has no other taxable income and any dividend income provided by the share portfolio has been ignored.

Note: If Boris’s share portfolio had instead been larger, for example $200,000, it would not be possible to rely on the work text exemption to contribute the entire sale proceeds. Where this is the case, the optimal strategy will likely be to sell part of the share portfolio in each of the 2018-19 and 2019-20 financial years and make use of both years’ contributions caps, including relying on the work test exemption in the 2019-20 financial year. Under this multiple contribution strategy, it would be important to confirm that Boris’s total superannuation balance at 30 June 2019 will be under $300,000.

Trap: Deferring property sale and losing existing year’s contributions caps

Where a client who is already 65 at the start of the financial year is retiring and has an asset that they wish to sell, they may receive a better tax outcome by delaying the sale until the financial year after retirement – as shown in Example 4. However, where the asset is an indivisible asset (e.g. an investment property), this strategy may mean the client loses one year of non-concessional contributions cap, as they do not have any funds to make a non-concessional contribution in the year of retirement.

Where such a client cannot otherwise use their non-concessional cap in the year of retirement, it is important to compare selling the asset in the year after retirement to minimise tax on the asset sale, versus selling the asset in the year of retirement to maximise overall superannuation contributions.

Example 5: When to sell an investment property

Mike (age 72) retires on 1 May 2019, having received a salary of $90,000 during the 2018-19 financial year. He has an investment property valued at $500,000, providing net rental income of $15,000 per annum, which has been held for many years and has an unrealised capital gain of $200,000. He has no other funds to make superannuation contributions.

To minimise tax, Mike can wait until the start of the 2019-20 financial year to sell his investment property. This would allow him to make a personal concessional contribution of $41,450 (his 2019-20 financial year cap is $25,000 plus $16,450 unused cap carried forward from the 2018-19 financial year) and $100,000 non-concessional contribution during the 2019-20 financial year, using the work test exemption.

In this case, the income tax and Medicare levy liability attributable to the capital gain, after allowing for the tax deduction for the contribution, is $11,095, and Mike’s total net super contribution in the 2019-20 financial year is $135,233 ($100,000 + $41,450 x .85).

Alternatively, Mike could sell his investment property just prior to the end of the 2018-19 financial year. This would allow him to make a personal concessional contribution of $16,450 (the concessional cap remaining after the Super Guarantee) and $100,000 non-concessional contribution during the 2018-19 financial year, and a further $100,000 non-concessional contribution in the 2019-20 financial year using the work test exemption.

In this case, the income tax and Medicare levy liability attributable to the capital gain after allowing for the tax deduction for the contribution is $33,574, and Mike has made a total net super contribution of $213,983 ($200,000 + $16,450 x .85).

By delaying the sale of his property until the 2019-20 financial year, Mike saves just under $22,500 in income tax and Medicare levy, but his net contribution to super is $78,750 less.

In this example, it is assumed that Mike has no other taxable income and that rental income from the property is paid for all of the 2018-19 financial year but none of the 2019-20 financial year.

TIP: Using work test exemption for recontribution strategy

Where a client who is already 65 at the start of the financial year is retiring, but does not have additional cash or assets to fund super contributions under the work test exemption, they could consider using the exemption in the next financial year to undertake a recontribution strategy. This can be effective where future death benefits will be paid to beneficiaries who are not dependants for tax purposes, for example, adult children.

Example 6: Recontribution strategy

Andrea (age 67) retires from full-time work on 1 June 2019. She has a superannuation balance of $250,000 (all taxable component) in a retail superannuation fund. Her only beneficiary is her adult child, Tom, who is nominated in a binding death benefit nomination.

As part of her estate planning strategy, Andrea makes a lump sum withdrawal of $100,000 in June 2019 and immediately recontributes it back into a new super account.

Assuming her balance remains the same, in the event of her death, the tax payable on her death benefit by Tom will decrease from $42,500 to $25,500, as a result of the strategy – a saving of $17,000.

Using the work test exemption (and assuming again that her balance remains the same), Andrea makes a further lump sum withdrawal of $100,000 during the 2019-20 financial year from her first superannuation account and immediately recontributes it back into her new super account. In the event of her death, the tax payable on her death benefit by Tom will decrease to $8,500, as a result of the strategy – the work test exemption has therefore allowed Tom to save a further $17,000 in tax.

Note: While for simplicity this example assumes that Andrea’s superannuation accounts are in accumulation phase, in practice, clients of this age will likely have some or all of their accounts in retirement phase income streams (e.g. account-based pensions). Where this is the case, it is important to understand that contributions cannot be made to existing income streams, so a new accumulation account or recommencement of an income stream may be required to receive contributions under the work test exemption.

TIP: Delaying lifetime CGT cap contributions – indexation and an extra year of NCCs

With the introduction of the work test exemption, eligible clients who also have small business sale proceeds that qualify for the lifetime CGT cap, can benefit from a higher cap due to indexation if they delay their contribution to the year following retirement and rely on the work test exemption.

In addition, by delaying their lifetime CGT cap contributions until the year following retirement, they can qualify for an extra year of non-concessional contributions cap under the work test exemption.

When considering delaying small business CGT contributions, it is important to ensure that any contributions are still made within the timeframes required to qualify for the lifetime CGT cap.

Example 7: Accessing a larger lifetime CGT cap

John (age 68) sells his business assets for $2 million and retires on 1 April 2019. At that time, he has $130,000 in superannuation and has just made a $100,000 non-concessional contribution.

John qualifies generally for the small business CGT concessions and all business assets sold qualify for the 15 year exemption.

If John makes a lifetime CGT cap contribution in the 2018-19 financial year, he is limited to $1.48 million. He also becomes ineligible to use his non-concessional (or concessional) contributions cap in the 2019-20 financial year, as his total superannuation balance at 30 June 2019 is $300,000 or more.

If he waits until early in the 2019-20 financial year and relies on the work test exemption, the lifetime CGT cap will be indexed. Assuming the lifetime CGT cap in the 2019-20 financial year is $1.515 million, John is able to make an extra $35,000 in super contributions by delaying the contribution of his small business sale proceeds and relying on the work test exemption. In addition, he is able to use other contributions caps under the work test exemption, allowing a further $100,000 in non-concessional contributions during the 2019-20 financial year.

John has therefore been able to make an extra $135,000 in super contributions by delaying the contribution of his small business sale proceeds until the 2019-20 financial year.

Craig Day, Executive Manager – Technical Services, Colonial First State.

***

QUESTIONS

Take the quiz here

1. Which of the following is the commencement date of the new work test exemption?

a. 1 July 2018.

b. 1 July 2017.

c. 1 July 2019.

d. 1 January 2019.

 

2. A client who has used the work test exemption in a previous financial year can utilise the work test exemption again in a later financial year. True or false?

a. True.

b. False.

 

3. Which of the following types of contributions cannot be made using the work test exemption?

a. Spouse contribution in respect of a spouse who is age 70 or over.

b. Personal deductible contribution.

c. Non-concessional contribution using the bring forward provisions.

d. Contribution under the lifetime CGT cap.

 

4. Bob met the work test in 2018-19. He is age 66 and wants to contribute in 2019-20. Assuming his total super balance at 30 June 2019 is $295,000, can Bob make a voluntary contribution?

a. Yes.

b. No.

 

5. George met the work test in 2018-19. He is age 77 and wants to contribute in 2019-20. Assuming his total super balance at 30 June 2019 is $295,000, can George make a voluntary contribution?

a. Yes.

b. No