Tax concessions, the work test and getting it right with super

The work test for superannuation purposes doesn’t become an issue until you reach 65. From then on it becomes important for personal concessional and non-concessional contributions. But what if you are being paid and not at work, will you meet the work test?

To meet the work test you must be employed or self-employed for at least 40 hours in 30 consecutive days prior to making the contribution. So, you must have worked the required number of hours before the contribution can be made.

This rule creates a problem if you wish to contribute early in July, but may have to wait until the end of the first week or longer before you contribute. At the other end of the financial year, if you haven’t worked at all until late in the year, you may have to wait as late as June before the contribution’s made.

The work test doesn’t apply for anyone:

• under 65, or
• age 65 or over and are making downsizer contributions or 
• between 65 and 75 in the first year after retirement.

Employer contributions made for super guarantee purposes can be made at any age but for salary sacrifice contributions require you to meet the work test and be under age 75.

What it means to be ‘gainfully employed’

To be gainfully employed you must be employed for gain or reward in any business, trade, profession, vocation, calling, occupation or employment. Gain or reward takes into account receipt of salary or wages, business income, bonuses, commissions, fees or gratuities.

If you undertake voluntary or charity work you are unlikely to satisfy the definition of gainfully employed as you would not be employed in any business, trade etc. Any benefits or payments received in this type of work are usually expense reimbursements or incidental meals which are not remuneration or part of any agreement to provide skills and services. Incidentally, if you are in receipt of a carer’s allowance from the government you are not in gainful employment.

Gainful employment and periods of leave

Whether you are gainfully employed can be unclear if you are employed in paid employment but not physically working. The absence of any personal exertion if you are:

• on paid annual leave, or
• on unpaid leave such as long service leave, or
• off work while being paid workers compensation or income protection.

Leave taken (paid or unpaid)

If you are on paid and unpaid leave when you are employed it normally counts towards the work test. Unfortunately, neither of the superannuation regulators, APRA nor the ATO, have any current published information that confirms this view. However, both regulators have indicated in the past that:

• the ATO has provided non-binding advice that someone on unpaid leave that a person on unpaid leave may be considered gainfully employed. This would be accepted in the circumstances, ‘if their usual arrangement is to be remunerated and they would under ordinary circumstances work at least part time’ at least 10 hours each week.
• 'APRA regards periods of authorised leave, whether paid or unpaid, and actually taken by the member as leave, as periods of gainful employment in applying the gainful employment test for contributions in respect of members aged 65 or more'. (APRA Prudential Practice Guide SPG270 (para.59)). The updated version of this SPG removed this guidance, however, there has been no indication that this view has changed.

If you have any doubts on whether you are gainfully employed seek legal advice or an opinion from the ATO.

Unused leave payments

Lump sum payments for unused leave received after you have terminated employment do not count towards a period of gainful employment. A previous APRA guide says:

Workers compensation and income protection

If you are in an employment arrangement and receiving:

• workers compensation payments from their employer or insurer, or
• income protection payments from their employer, insurer or super fund

…you may still be gainfully employed and satisfy the work test even though you are not currently undertaking physical work providing any payment has a connection to your employment arrangement.

If you have any doubts seek advice from someone with superannuation expertise.

Work test exemption

If you are at least 65 you can contribute to super in the first year after you have retired and meet certain conditions. This allows you more time to make contributions to superannuation in the year after your retirement.

Since 1 July 2019, if you are between 65 and 75 a work test exemption is available which allows you to make personal voluntary contributions if:

• you met the work test (40 hours of gainful employment in a 30 consecutive day period) in the previous financial year, and
• your total superannuation balance at the end of the previous year is less than $300,000, and
• you have not made use of the work test exemption in the past.

There are some important points to remember which are:

• this work test exemption can only be used in one financial year. It cannot be used again if you have recommenced work after retirement and then retire again in a later financial year.
• it is available only if you have ceased work for the last time at age 64 or later. As the exemption is only available for members age 65 to 74 the exemption is only available if you cease work for the last time on or after age 64. If you ceased work for the last time prior to reaching 64 the exemption is not available to you.
• access to the work test exemption is available only if your total super balance is below $300,000 at the end of the previous financial year. For members of couple who are both 65 and older it may allow them to equalise superannuation balances where one partner has a superannuation balance of less than $300,000.

Different types of contributions

The work test exemption allows you to make concessional and non-concessional contributions depending on your situation. The maximum non-concessional contributions that you can make without penalty after reaching 65 is $100,000. The maximum concessional contribution is usually $25,000 but may be higher if you are able to access catch up concessional contributions which allows you to carry forward your unused concessional contributions cap amount for the previous 5 years.

Other contributions that could be made in the first year after retirement can include the small business CGT cap amount of up to $1.515 million (limit for 2019-20) or contributions due to structured settlements.

Case study: example one

Craig is 67 on 1 July 2020 and wishes to make non-concessional contributions of $100,000 to his super fund. He left employment on 1 February 2020 and won’t be employed during the 2020/21 financial year. His total super balance on 30 June 2019 was $200,000. As Craig will qualify under the work test exemption, he will be able to make non-concessional contributions to his super fund in the 2020/21 financial year.

Case study: example two

Julie who is 66 wishes to use the work test exemption to trigger the bring forward rule. She retired from employment on 30 October 2019 and as at 30 June 2019 had a total super balance of $160,000. She inherited an amount from her mother’s estate which she would like to contribute to her super fund. During the 2019/20 financial year she may wish to make a non-concessional contribution of up to $100,000 and a concessional contribution of $25,000. In the 2020/21 financial year she may be able to make a non-concessional contribution of up to $100,000 and may claim a concessional contribution of $25,000 or a greater amount depending if she has any unused concessional contributions cap over the past 5 years.

Members 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 above.

Limits on the work test exemption

The work test exemption does not permit you to contribute when an age restriction applies to you. This applies for:

• spouse contributions which can be made if he or she meets the work test between age 65 and 70 but cannot be made for a spouse 70 or over
• other voluntary contributions that relate to a member 75 or over (including 28 days after the end of the month the member turns 75).

What’s in the works?

The Government has proposed to amend the superannuation contribution rules from 1 July 2020 to abolish the work test for anyone who is 65 and 66 to allow voluntary member and voluntary employer contributions to superannuation. This proposal is not yet law, it was put forward in the 2019 federal budget.

Importance of the super work test

The superannuation gainful employment and work test rules for withdrawing benefits from super or once you reach 65 if you wish to contribute to super should be understood clearly otherwise you could expose your self to various penalties for accessing your super early or for excess contributions.