Contributions and the work test
A fund member’s age can impact their eligibility to make voluntary contributions to superannuation. For some of these contributions, meeting the ‘work test’ can allow a member to make contributions where they otherwise wouldn’t be eligible due to their age. A change to the work test requirements now looks to provide greater opportunities for members to make contributions to their superannuation fund. This article will look at the recent change to the work test as well as some other current and proposed changes to contribution requirements.
The work test
For the 2020 and earlier income years, before a member turns 65 they are eligible to make voluntary contributions to their superannuation fund without needing to satisfy any conditions (except for certain contributions limited by the member’s total superannuation balance post 1 July 2017). However, a member between 65 and 74 loses the ability to make these contributions unless they have already met the work test during that income year.
To meet the work test a member must have worked at least 40 hours within 30 consecutive days in that income year. For a member who turns 75 during the income year they will have 28 days after the end of the month in which they turned 75 to make contributions, assuming the work test was met in that year.
A work test exemption was introduced from 1 July 2019 which effectively gives a member the ability to make a voluntary contribution in a year they had not met the work test as long as they:
- met the work test in the preceding income year,
- had a total superannuation balance of less than $300,000 at the end of the preceding income year, and
- had not previously taken advantage of the work test exemption.
Contributions impacted by the work test include: non-mandated employer contributions, personal contributions, spouse contributions and government co-contributions. The exclusions to this rule are mandated employer contribution which can always be made and downsizer contributions which are only eligible for those 65 and older.
Current and proposed changes
Legislated on 28 May 2020, Superannuation Legislation Amendment (2020 Measures No. 1) Regulations 2020 has changed the work test requirements. This change to the work test is regarding the age a member must be before they are required to meet the work test when making voluntary contributions. Instead of those between 65 and 74 being required to meet the work test only those between 67 and 74 now need to meet the test in order to make voluntary contributions. Those aged 65 and 66 are able to make these contributions without the work test being met.
Also included in the amendment is an increase to the maximum eligible age for those looking to receive spouse contributions from 69 to 74.
Another proposed measure which would impact on members’ eligibility to make contributions is extending access to the bring-forward arrangement when making non-concessional contributions to include those aged 65 and 66. This has been introduced to parliament in the Treasury Laws Amendment (More Flexible Superannuation) Bill 2020 but has not yet been passed.
This change to the work test and proposed change to the bring-forward rule (assuming it is legislated) does mean that those who were going to turn 65 and had been looking to make non-concessional contributions before being required to meet the work test, do now have more to think about. Those eligible to use the bring-forward rule may have been intending to make a $300,000 non-concessional contribution to take advantage of the final year they could make these non-concessional contributions without meeting the work test, but doing this now may not be the most advantageous way to manage their contributions.
Monica was 64 at 1 July 2019 and will turn 65 on 15 June 2020. At 30 June 2019 Monica’s total superannuation balance was $800,000 and, as such, she was eligible to make non-concessional contributions in the 2020 income year. Monica is also retired and has not worked for several years, so she knows she will not satisfy the work test. Based on these details it was Monica’s intention to take full advantage of her final opportunity to make non-concessional contributions by using the bring-forward rule to make a non-concessional contribution of $300,000 before 15 June 2020.
However, while approaching her 65th birthday Monica heard that there is now an amendment to the legislation which changes the requirement to meet the work test from age 65 to 67 from 1 July 2020. Monica also discovered that there is a proposed change to allow those who are 65 and 66 to make use of the bring-forward arrangement. Due to this, Monica reconsiders her options when it comes to making contributions.
After reviewing her options, Monica decides to only make a non-concessional contribution of $100,000 in the 2020 income year. Monica will then be able to make an additional non-concessional contribution of $100,000 in the 2021 income year and then make use of the bring-forward arrangement to make a non-concessional contribution of $300,000 in the 2022 income year before she turns 67, assuming her total superannuation balance is below the required value and that this change is legislated.
The change to the work test requirements has given Monica two extra years in which to make non-concessional contributions, and other eligible contribution types, to her fund without needing to meet the work test. Assuming the extension of the eligibility for the bring-forward arrangement is legislated in its current form, this allows Monica to make additional non-concessional contributions of $200,000, compared to her original intention of using the bring-forward arrangement in the 2020 income year.
With the change to the work test and the proposed change to the bring-forward arrangement this provides much greater flexibility for those approaching age 65 and under age 67 when it comes to making contributions. Increased opportunities for those approaching retirement to contribute to superannuation can aid in retirement planning and with the recent market volatility impacting many people’s superannuation balances may be very useful going forward.