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Reaching age 65 is one of life’s big milestones, but unfortunately, it does make putting money into your super account a bit more difficult.
Instead of just being able to make an electronic payment straight into your super account, you need to prove you are actually ‘working’ as well.
If you are aged 65-74, you must be working for a minimum of 40 hours in any 30 consecutive day period to make voluntary contributions to your super account. This is what’s known as the dreaded superannuation work test.
Superannuation work test: How does it work?
The key thing to understand about the work test for super contributions over the age of 65 is that you need to be ‘gainfully employed’ on at least a part-time basis to pass the work test.
It also requires you to be ‘gainfully employed’ for at least 40 hours in a period of 30 consecutive days in each financial year in which you wish to make super contributions (within the contributions caps) throughout the financial year. The 40 hours can be in any arrangement over the 30 consecutive days (for example, 9am to 5pm over four days, or a few hours each week).
The 30 consecutive days can be at time during the financial year you want to make a voluntary super contribution, so they don’t have to be all in the same calendar month. The 40 hours amount is the minimum requirement you need to meet and there is no maximum limit on how much you can work.
What does ‘gainful employment’ mean?
According to the ATO, ‘gainful employment’ means you are employed or self-employed and getting paid for it.
Gainful employment can be any business, trade, profession, vocation, calling, occupation or employment. You must, however, be being remunerated in return for the personal services you are providing through a salary, business income, bonus or commission. The employment arrangement also needs to be fully documented and declared for income tax purposes.
Unfortunately for those wanting to make a super contribution after age 65, unpaid work does not meet the definition of gainfully employed. Volunteering or charity work are not gainful employment, as you are not paid for your work.
Receiving payments for assisting family members by babysitting or gardening for example, generally does not meets the definition of ‘gainful employment’ either. Being paid to look after grandchildren while their parents are away on an extended holiday is also unlikely to be accepted as a true employment situation. There have been a number of tax cases where the courts have ruled arrangements like these are really a domestic arrangement rather than employment, so your super fund is unlikely to accept them as employment for work test purposes.
Generally, the gain or reward required for ‘gainful employment’ under the work test cannot be passive investment income such as dividends from shares, or rent received from an investment property.
Proving you meet the work test
When making a Work Test Declaration to your super fund, it is important to retain evidence of the work you performed, as in the future you could be asked to provide appropriate evidence to support your declaration.
In the event of an ATO audit, if the Tax Commissioner is not satisfied with the evidence you provide to support your Work Test Declaration, your super contribution could be disallowed.
Case study 1
Jenny is aged 67 and works part-time two days every week as an administrative assistant.
She has a salary sacrifice arrangement with her employer and contributes her entire $24,000 salary into her super account, which means Jenny has no taxable income to declare in her income tax return.
Although Jenny has no taxable income, she can still satisfy the work test as her employer will prepare a PAYG payment summary for her at the end of each financial year.
The salary sacrificed amount will be reported as super contributions, which provided evidence of the gain or reward for her employment needed to satisfy the work test.
Case study 2
Junyoung is aged 68 and is a self-employed kitchen designer. He wishes to make a personal non-concessional (after-tax) contribution into his SMSF account.
To satisfy the work test so he can make the contribution, he keeps notes of the work and activities he completes during the financial year, together with invoices and pay slips to substantiate both his employment income and the hours worked.
He also keeps records showing the work completed and the commercial rate paid for projects to demonstrate he is genuinely carrying on a business for gain or reward.
Making a declaration: doing your work test paperwork
Super funds generally require you to submit a Work Test Declaration form to confirm you have met the requirements of the test. You are responsible for being able to prove you have met the requirements.
A Work Test Declaration is required each financial year you make personal contributions into your super account after you reach age 65. Generally, the forms require you to sign a declaration that you have met the work test requirements in the financial year that the contributions were made or applied.
Some super funds require the work to be already completed and not be prospective employment, or work to be undertaken in the future during the financial year.
It’s always wise to check with your super fund for its particular requirements in relation to the work test before making any contributions after age 65.
New Work Test Exemption
If you don’t meet the work test rules or this all sounds too complicated, there are some recent changes which may assist you.
From 1 July 2019, the government has introduced an exemption from the work test for voluntary superannuation contributions in the first income year after retirement to allow retirees more time to get their affairs in order as they prepare for retirement.
This new exemption means an individual aged over 65 (but under age 75) will be able to make voluntary contributions for one more year after they stop working.
To use the Superannuation Work Test Exemption, however, you will need to have a Total Superannuation Balance of less than $300,000. This is your balance at 30 June of the previous financial year and you are not required to remain under the balance cap for the whole 12-month period.
If you qualify, the exemption applies for 12 months following the end of the financial year in which you last met the work test, giving you an extra year in which to boost your superannuation savings. The exemption is only available for one 12-month period in an individual’s lifetime. So if you use the exemption to make a contribution and then return to work, you cannot use it again when you retire at a later date.
Note: During the 12-month exemption period, you can access any unused concessional (before-tax) contributions cap to contribute more than $25,000 using the carry-forward rules.
How much can you contribute in the exemption period?
You can make contributions into your super account up to the concessional and non-concessional contributions caps for that particular financial year ($25,000 and $100,000 caps respectively in both 2018/2019 and 2019/2020).
You will also be able to use the Superannuation Work Test Exemption to access the ‘bring-forward’ contribution arrangements. In the original rules announced for the exemption, you could not use a bring-forward arrangement for non-concessional (after-tax) contributions. The final legislation, however, allows you to make bring-forward contributions during the 12-month period. This will allow you to make non-concessional contributions of up to three times the normal annual cap (currently $100,000, so the bring-forward amount is $100,000 x 3 = $300,000).
For more information, see SuperGuide article A super guide to understanding the bring-forward rule