Treasury has released for draft consultation the amendments to extend the work test exemption for recent retirees.  This announcement was made in the 2018-19 Federal Budget, whereby it makes amendments to the non-concessional contributions (NCC) rules in the ITAA 1997 to complement proposed amendments to the contribution acceptance rules within the SIS Regulations (SISR 7.04).

The proposed regulation changes provide a one-year exemption from the ‘work test’ that applies as part of the contribution acceptance rules to allow recent retirees to boost their super balance, without comprising the integrity of the bring forward period of up to three years.

 

As it currently stands…

For an individual to keep making contributions between 65 – 74 years, they are generally required to meet a ‘work test’ whereby they must complete 40 hours of work within a consecutive 30 day period.

These laws was enacted will provide a one-year exemption from the work test for super contributions to allow retirees with a total superannuation balance of less than $300,000 to make contributions in the following year after ceasing gainful employment.

 

The interaction with the work test exemption and bring-forward rules

In order to access the bring forward rules for NCCs, an individual must be under 65 years of age at 1 July in the first year of the bring forward arrangement.  Generally, someone 65-74 years must satisfy the work test during a financial year to make contributions.  However, these amendments from 1 July 2019 will mean that a member that satisfied the work test during the previous financial year may make contributions for a financial year without satisfying the work test in that year.

Therefore, the interaction between the bring-forward rule and the work test exemption may allow certain individuals (transitioning between 64 & 65) to bring forward up to 3 x NCC cap in a financial year in which they did not satisfy the work test.  It is not intended that the work test exemption be used to provide benefits equivalent to providing an additional three years to make voluntary contributions.

To understand this further, let’s look at the following examples:

 

Example 1 – individual prevented from accessing the bring-forward rule by relying on the work test exemption contributions (WTEC)

Jake turns 65 on 10 August 2019.  Jake has not made any NCC contributions before his 65th birthday.  On 11 August 2019, Jake makes a member contribution (NCC) of $130,000 into his SMSF.  As the contribution is made after 10 August 2019, in accordance with the rules that apply for members aged 65, before accepting the contribution the trustees of Jake’s SMSF must be satisfied that either:

1. Jake satisfies the work test for the 2019-20 financial year; or
2. that Jake qualifies for the work test exemption for the 2019-20 year.

Jake was not gainfully employed during the 2019-20 financial year and therefore does not satisfy the work test for that year.  Jake worked part-time for 12 hours a week during the 2018-19 financial year and meets the other criteria for qualifying for the work test exemption for the 2019-20 financial year.  As Jake’s member contribution of $130,000 are only accepted by the fund due to the ‘work test exemption’, these contributions are treated as such.

In order to be eligible to access the bring-forward NCC cap for 2019-20 financial year, Jake must:

• have been less than 65 years of age at 1 July 2019; and
• must have made contributions greater than 1 x general NCC cap (excluding his work test exemption contributions)

As Jake was 64 years at 1 July 2019, he is eligible to access the bring-forward option for NCCs in the 2019-20 financial year (assuming all other criteria has been met).  Assuming the NCC cap is $100,000 for that financial year, the $130,000 exceeds the general NCC cap.  However, under the amendments, Jake’s work test exemption contributions must be excluded.  Jake’s NCCs excluding his work test exemption contributions do not exceed the general NCC cap (i.e. $130,000 [NCCs] less $130,000 [WTEC] does not exceed $100,000).

Therefore, Jake would not be eligible to access the bring-forward rule in the 2019-20 financial year as he has relied on the work test exemption to make contributions for that year and without the exemption, Jake would not have made any contributions to trigger the bring forward rule.

 

Example 2 – Individual that has made work test exemption contributions, but can still bring access the bring-forward arrangements for the financial year

Bob turns 65 on 1 November 2019.  On 10 October 2019 (before Bob’s birthday), he makes a member contributions of $167,000 to his SMSF.  The fund accepts the contribution on the basis that he was less than 65 and his total super balance at the previous financial year was less than $300,000 (allowing up to 3 x general NCC cap).

On 5 December 2019, Bob makes further contributions of $18,000 into the fund.  As these contributions are made after turning 65, Bob is required to have satisfied a work test for 2019-20 financial year or ensure that Bob qualifies to treat the amount as a work test exemption (WTE) contribution.

Bob was not gainfully employed during the 2019-20 year and therefore does not satisfy the work test for that year.  Bob worked part-time for 30 hours per week in the previous income year and meets the other qualifying conditions for the work test exemption for 2019-20.  As Bob’s member contributions of $18,000 are only accepted by the fund due to the work test exemption, the contributions are WTE contributions.

In order to be eligible to access the bring-forward rule for the NCC cap in 2019-20, Bob must:

• have been under 65 years of age at 1 July 2019; and
• have had NCCs for the financial year (excluding WTE contributions) that are greater than the general NCC cap

Being eligible to utilise the bring forward rule based on Bob being 64 at 1 July 2019, the calculation of his eligibility to trigger the bring-forward rule is as follows:

$185,000 (Total NCCs) minus $18,000 (WTE contributions) = $167,000 > $100,000 (general NCC cap)

Therefore, Bob is eligible to access the bring forward rule in the 2019-20 year as he has not relied upon on the work test exemption to make contributions to trigger access to the bring-forward arrangements.

 

Example 3 – No change to eligibility to access bring-forward arrangements if individual satisfies work test

Rachael turns 65 on 21 September 2019.  Rachael makes member contributions of $150,000 to her SMSF on 23 September 2019.  We will assume the general NCC cap remains at $100,000 for 2019-20.

Rachael was gainfully employed on a full time basis during the 2019‑20 financial year.  Rachael therefore satisfies the work test for that financial year.

Rachael’s NCCs for the financial year (excluding any work test exemption contributions) exceed the general non-concessional contributions cap ($150,000 exceeds 100,000). Rachael also meets the other criteria for accessing the bring-forward arrangements for NCCs.

Consistent with the current law, Rachael is able to access the bring-forward option for non-concessional contributions for the 2019-20 financial year. These proposed amendments do not preclude this outcome.  It is also worth noting that as a result of the repeal of the fund-capped contribution rules within SISR 7.04(3) from 1 July 2017, this amount of $150,000 as a contribution can be accepted as a single contribution (rather than be returned where greater than the general NCC cap).