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Reaching age 67 is now one of life’s big milestones, as that’s when most Aussies will become eligible for the Age Pension. But unfortunately, when it comes to the super system, it’s also the age when the super contribution rules start to tighten up.
Once you hit 67, putting extra money into your super account becomes more difficult as you need to prove you are gainfully employed, which means satisfying the superannuation work test.
Unfortunately, the super work test and the work test exemption can be a little tricky to understand, so here’s a simple guide to the key points.
Need to know
Up to 30 June 2020, once you reached age 65 you needed to meet the requirements of a work test or work test exemption if you wanted to make non-concessional or non-mandated employer contributions into your super account.
In May 2020, Superannuation Legislation Amendment (2020 Measures No. 1) Regulations 2020 changed this requirement and began the process of aligning the work test requirement with the eligibility age for the Age Pension. (The Age Pension age is currently legislated to increase from age 66 to age 67 from 1 July 2023. For more information about the Age Pension age, read SuperGuide article What is the current Age Pension age?.)
This means from 1 July 2020, if you’re aged under 67 you can make personal or non-concessional contributions into your super account without needing to meet a work test requirement.
Once you reach age 67 you will still be required to meet the work test or use the one-off work test exemption.
What is the superannuation work test (and the work test exemption)?
The key thing to understand about making contributions into your super account if you’re aged 67 to 74 is that you also need to be gainfully employed before your super fund will accept your contributions. This is referred to as the superannuation work test.
If you can’t meet the conditions of the work test, from 1 July 2019 there is a one-off work test exemption applying to recent retirees. This work test exemption allows recent retirees to make super contributions if their total superannuation balance (TSB) is less than $300,000 (see later in the article).
Need to know
Meeting the requirements of the work test does not apply if you plan to make a downsizer super contribution from the sale of your home, or to mandated employer contributions like Superannuation Guarantee (SG) contributions.
What are the super work test rules?
The key to the super work test is that once you turn 67, you must be able to prove you are gainfully employed before your super fund will accept your super contributions.
Gainfully employed is defined as working at least 40 hours in a period of 30 consecutive days during the financial year in which you wish to make super contributions. 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 any time during the financial year in which 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 many hours you can work.
Need to know
It’s not the ATO that administers the work test rules – it’s your super fund. So it’s worth talking to your fund to see if it will accept your declaration that you’ve met the work test requirements.
Although many super funds only require you to sign a form declaring you have met the work test, if the ATO decides to audit you in the future you will need to prove you have met the work test requirements.
If you are unsure, you can apply to the ATO for an interpretive decision on whether or not your circumstances will meet the gainfully employed definition for the work test.
What does gainfully employed 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 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.
Unpaid work does not meet the definition of gainfully employed. Volunteering or charity work is not considered 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 meet the definition of gainful employment either. Being paid to look after your grandchildren while their parents are away on an extended holiday is also unlikely to be accepted as a true employment situation. There have been 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 such arrangements 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.
How to prove you meet the work test
Most super funds require you to submit a written Work Test Declaration that you have been gainfully employed before accepting your contribution. 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 67. Generally, you need to sign a declaration that you have met the work test requirements in the financial year the contributions were made or applied.
Some super funds require the work to be already completed and not be prospective employment undertaken later in the financial year. It’s sensible to check with your super fund for its particular requirements before making any contributions.
It’s also important to retain evidence of the work you performed, as you could be asked to provide appropriate evidence to support your declaration in the future. If the ATO audits you and the Tax Commissioner is not satisfied with the evidence you provide, your super contribution could be disallowed.
Case study 1
Jenny is aged 69 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. She can download the necessary information from the ATO’s online service via her myGov account at the end of each financial year.
The salary-sacrificed amount will be reported to the ATO by her employer through the Single Touch Payroll system as a super contribution, which will provide 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 payment 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.
What is the work test exemption?
As many older Aussies find the work test rules difficult to meet, from 1 July 2019 the government introduced an exemption from the work test for voluntary super contributions made in the first income year after you retire. This exemption is designed to allow recent retirees more time to get their affairs in order as they prepare for retirement.
The work test exemption means if you are aged 67 and over (but under age 75), you can make voluntary super contributions for one more year after you stop working.
To qualify for the work test exemption, you must have:
- Satisfied the work test in the financial year preceding the year in which you make the contribution
- 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)
- Not previously used the work test exemption (if you use the exemption to make a contribution and later return to work, you can’t use it again when you retire).
How much can you contribute using the work test and work test exemption?
If you are using the work test or work test exemption to make contributions into your super account, you can contribute any amount up to the concessional and non-concessional contributions caps for the financial year ($25,000 and $100,000 respectively in 2020/21).
You may also be able to use the bring-forward contribution rules to make a larger contribution during the 12-month exemption period. These rules allow you to make non-concessional contributions of up to three times the normal annual cap (currently $100,000). This means your bring-forward contribution amount could be $100,000 x 3 = $300,000.
For more information, read SuperGuide article A super guide to understanding the bring-forward rule.
Need to know
To align the bring-forward rules with the new upper age limit of 67 before you are required to meet the work test, the government is introducing new legislation that will allow older super fund members to access the existing bring-forward provisions.
This means if you are under age 67 (currently 65), you will be able to contribute up to $300,000 into your super account if you meet the other eligibility criteria.
At the time of writing, this legislation is still before the House of Representatives and has not yet been passed and come into effect, so fund members aged 65 and older are unable to use the bring-forward rules.
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