Contributing to super
The recent change to change to the work test for making contributions to superannuation to age 67 has certainly raised issues with clients making contributions after 65 and how those changes impact on any contributions that are being made for them. The downside of the Government’s 2018 budget announcements for superannuation contributions is that the opportunity to use the bring forward rule is still restricted to those age 65 or younger.
The changes to the income tax law in the Treasury Laws Amendment (More Flexible Superannuation) Bill 2020, which move the bring forward rule to age 67, remain in the House of Representatives. As parliament does not resume until early August, the bill has a way to go prior to becoming law. So where are we now with contributions for anyone 65 or older with the start of the 2020/21 financial year?
Until 30 June, 2020, personal concessional and non-concessional contributions could be accepted by a fund without any work test being met prior to the member reaching age 65. However, once the person reached the age 65 in the financial year the member was required to meet the work test at some time during that year and in all later financial years prior to the contribution being accepted.
As with personal superannuation contributions, the fund trustee is unable to accept personal concessional or non-concessional contributions any later than 28 days after the month in which the person reaches age 75. There is one exception to the age test which is the acceptance of downsizer contributions.
The only exceptions to the work test are where a person wishes to make contributions in the year after ceasing work and downsizer contributions. Ceasing work contributions are permitted to be made on a once only basis after the member has reached 67, previously age 65, in a year after they have ceased work if they have a total super balance on 30 June in the previous year of less than $300,000. These contributions can be accepted by the fund trustee 28 days after the month in which the person reaches 75.
As far as downsizer contributions are concerned, a person and their spouse are eligible to each make a contribution of up to $300,000 within 90 days of selling their main residence after age 65. There is no upper age limit applying to downsizer contributions or any work test that needs to be satisfied.
Anyone who is employed after age 65 may be eligible for compulsory employer contributions and if they meet the work test, they may wish to salary sacrifice to super.
Employer-mandated contributions, such as those made for super, guarantee purposes or under an industrial award, are not subject to a work test or age limit. However, other employer contributions, including salary sacrifice, are subject to age limits described above.
The changes to the work test requirements have been extended to include non-concessional contributions made for an eligible spouse. The age restriction which applied up to 30 June, 2020, permitted spouse contributions to be made between ages 65 and 70 providing the spouse met the work test.
From 1 July, 2020, this is now extended to apply for spouse contributions made between 67 and 28 days in the month after the spouse reaches 75 in line with other personal superannuation contributions. The work test is required to be met prior to contributions being made to the fund.
In relation to the operation of the bring forward rule for non-concessional contributions, those fund members who are in the 65 to 66 age bracket are in a bit of a dilemma from now until the time when the passage of the legislation is clear. It is only those members who have a total superannuation balance of less than $1.5 million as at 30 June, 2019, or 2020 that should be concerned if they wished to maximise their non-concessional contributions by using the bring forward rule.
The rules for non-concessional contributions allow up to two years standard non-concessional contribution to be brought forward if the total super balance as at 30 June in the previous financial year and up to one year standard non-concessional contribution is between $1.4 and $1.5 million. Anyone with a total superannuation balance of greater than $1.5 million on those dates does not have access to the bring forward rule for the subsequent financial year.
As an example of the operation of the bring forward rule, a person who is currently 65 would have access to the bring forward rule of at least one year standard non-concessional contribution assuming their total super balance is less than $1.5 million. If they contribute greater than the standard non-concessional contribution, the bring forward rule will be triggered and they will be able to make the relevant contributions over a two or three year period. If they make the contributions prior to reaching age 67 the fund can continue to accept the contributions without requiring the member to meet the work test.
In contrast, a person who is currently 66 or 67 will not be able to trigger the bring forward rule as they were older than 65 on 1 July in the 2020/21 financial year. This will limit the maximum amount of non-concessional contribution they can make without penalty to $100,000 p.a., however, the consolation is that there is no requirement for them to meet the work test unless they wish to make contributions in the financial year after they reach 67.
CASE STUDY
Neroli is 67 on 13 July, 2020, and has recently ceased work. In light of the proposed changes to making superannuation contributions and due to the downturn in the investment markets she delayed the sale of her listed shares until the market improved. She planned to make a non-concessional contribution of up to $300,000 from the sale of the shares by accessing the bring forward rule before her 67th birthday. Her total super balance on 30 June, 2020 was $450,000 which meant she could not access the ceasing work contributions. Also, she did not intend to go back to work in the 2020/21 financial year.
This means that Neroli is in a bit of a dilemma as she had to wait until the sale of the shares before she could make a non-concessional contribution to her fund. The contribution would need to be made prior to her reaching age 67 on 13 July, 2020 and she would not have access to the bring forward rule which would allow her to make a non-concessional contribution of up to $300,000.
WHERE TO NOW?
Increasing the age at which the work test applies in line with the age pension age is a worthwhile move which starts to align the superannuation system and qualifying for social security benefits. However, as with all changes, issues have revealed themselves around the margins and these are exacerbated with the current COVID–19 situation.
We now are able to make concessional and non-concessional contributions until we are age 67 without having to meet the work test. But we wait with eagerness to see how the legislation will accommodate the bring forward rule for those intending to make non-concessional contributions but have fallen between the cracks, like Neroli.
Graeme Colley is executive manager, SMSF technical and private wealth at SuperConcepts.
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