The 2021 Federal Budget included a proposed measure that from 1 July 2022, the work test would no longer be required to be met by individuals aged 67 to 74 for voluntary contributions like non-concessional contributions and salary sacrifice contributions. However, individuals aged 67 to 74 would still need to meet the work test requirements in order to make any personal deductible contributions.
The ‘work test’ refers to the requirement for individuals, aged 67 to 74, to be ‘gainfully employed’ for at least 40 hours in 30 consecutive days to enable the superannuation trustee to accept certain contributions, generally member contributions and employer non-mandated contributions. However, these rules are contained in the SIS Regulations and consequently the removal of the ‘work test’ requires amendment to SIS Regulation 7.04.
Schedule 4 to Treasury Laws Amendment (Enhancing Superannuation Outcomes for Australians and Helping Australian Businesses Invest) Bill 2021 that was introduced to the lower house on 27 October 2021 partially implements the 2021 Federal Budget measure. The schedule amends the ITAA 1997 to introduce a new provision that will apply the ‘work test’ to individuals aged between 67 to 75 years who claim a deduction for personal superannuation contributions. It does not amend the SIS Regulations to remove the ‘work test’ for the acceptance of contributions for those aged 67 to 74 – that is yet to come.
Effectively, the ‘work test’ from the SIS Regulations will be inserted into the ITAA 1997 in relation to a member contribution that will be claimed as an income tax deduction. The work test exemption for individuals with a prior total superannuation balance (TSB) of less than $300,000, that is included in SIS sub-regulation 7.04(1A) will also be included in the new ITAA 1997 provision.
Where the draft legislation is passed in its current form, an individual, aged from 67 up to 28 days after the end of the month in which they turn 75, will only be able to claim an income tax deduction for a personal superannuation contribution where:
- They had been gainfully employed for at least 40 hours in any period of 30 consecutive days during the income year in which the contribution was made; or
- All of the following are satisfied (the less than $300k TSB rule) – the individual:
- Met the ‘work test’ in the previous income year;
- had a TSB of less than $300,000 at the end of the previous income year;
- had not deducted a contribution in the previous income year or any earlier income years on the basis of this exemption (the less than $300k TSB rule). That is, like the rule in the SIS Regulations, the individual can only use it once;
It is important to acknowledge that a superannuation fund trustee is unlikely to be able to determine whether a contribution made by an individual will be claimed as an income tax deduction at the time it is made. For a member to claim a deduction for a personal contribution they must provide a valid notice to the trustee and receive an acknowledgement from the trustee, per section 290-170 ITAA 1997. Such notices can be provided at a time after the contribution has been made, reflecting that individuals can wait until the end of an income year before deciding the amount of personal contributions for which they wish claim as a deduction.
However, this will not be an issue for the superannuation fund trustee, once the SIS Regulations are amended to remove the ‘work test’ for those aged 67 to 74. If an individual makes a contribution to a fund and is unable to meet the work test or access the ‘one-off’ exception, then the contribution will remain a non-concessional contribution on the basis that no deduction can be claimed for it. Whether or not the personal contribution can be claimed as an income tax deduction will not affect the ability of the superannuation fund trustee to accept it. It will only affect whether it will be included as an assessable contribution of the fund.
Amendment to the bring forward rule for non-concessional contributions
Currently, individuals who satisfy the relevant criteria are eligible to bring forward up to the next two years of non-concessional cap. These criteria include that an individual is under 67 years of age in the financial year in which they make the contribution. Further, application of the bring forward rule is also dependent upon the individual’s prior 30 June total superannuation balance (TSB).
The amendments in this Schedule increase the cut-off age for accessing the bring forward rule from 67 to 75 years. This means that individuals aged 67 to 74 years (inclusive) who were not previously able to bring forward non-concessional contributions due to their age may do so, starting in the 2022-23 financial year.
However, this presents an interesting scenario. Does the extension of the bring forward rule mean that someone aged 73 or 74 can bring forward a non-concessional cap from a year where they are of an age that the superannuation trustee would not be able to accept such a contribution?
For example, Kevin is age 74 in the 2022-23 income year and has a prior 30 June 2022 TSB of $1m. Could Kevin make a non-concessional contribution of $330,000 in 2022-23, thus utilising his non-concessional cap from 2023-24 and 2024-25, when his age is 75 and 76? If Kevin made a contribution in either of those income years, the superannuation fund trustee could not accept the contributions, unless they were Downsizer contributions.
The Explanatory Memorandum (EM) states that:
‘Noting that individuals aged 75 and over are generally precluded from making voluntary contributions to superannuation, the amendments provided by this Schedule are not intended to enable individuals approaching 75 years of age to bring forward non-concessional contributions from future years (i.e. during which they will be aged 75 years or over) where they will not have eligible cap space. Individuals will only be able to access the bring forward arrangements for years in which they have cap space’.
Based on the EM, Kevin could only make a non-concessional contribution of $110,000. However, the proposed amendments in the Bill appears not to reflect this intention. The only change made to the bring forward provisions in section 292-85 ITAA is to change the cut off age from 67 to 75.
We are not sure what is meant by the term used in the EM of ‘eligible cap space’. The non-concessional cap is not determined by an individual’s age, but by their prior 30 June TSB. An individual aged 77, 80, 85 or 90 has a non-concessional cap where there prior 30 June TSB is less than the general transfer balance cap. The issue is that the trustee generally cannot accept the contribution under the contribution acceptance rule in the SIS Regulations and consequently the individual cannot take advantage of it.
Assuming the ‘work test’ is removed for those aged 67 to74 from the SIS Regulations, if Kevin made his contribution whilst still aged 74, the trustee could accept it. The contribution acceptance rule is applied at the time the contribution is made, not for each year the cap applies.
Further, he would be eligible for the bring forward rule as he was under age 75 at some time in the 2022-23 income year. The bring forward amount, for the first year, is determined under sub-section 292-85(5) and for an individual whose prior 30 June TSB is less than the relevant threshold (currently $1.48m) is simply 3 times the general non-concessional cap, 3 x $110k = $330k.
The EM may clearly articulate the intent of the application of the bring forward rule after the increase to the cut off age from 67 to 75, but it appears that proposed amendment to the law does not reflect it. Further amendments to the draft legislation appear to be required to achieve this.
We also await the relevant amendment(s) to the SIS Regulations to remove the ‘work test’ for those aged 67 to 74, from the contribution acceptance rules, which could potentially address the bring forward non-concessional cap issue.