Will you still need me, will you still love me, when I’m sixty-four (or five)
Reaching age 65 has always been a pivotal time when it comes to superannuation and retirement planning – from meeting an automatic age based condition of release to accessing preserved super benefits (no matter an individual’s work practices or intentions), right through to the requirements, and indeed complications, of meeting the work test in order to make additional voluntary contributions to super.
However, no longer will this time be a hard finish when it comes to final contribution planning as someone approaches, or indeed enters retirement.
Since 1 July, 2019, individuals aged between 65 and 74 who have recently retired, may be eligible to make additional voluntary contributions to super where they meet certain eligibility criteria around their previous year of work and their total super balance.
Add to this the 2019 Federal Budget announcements (although yet to be legislated) that provide individuals with more flexibility around planning for their retirement, again particularly in the area of contributions. If legislated as announced, from 1 July, 2020, Australians under the age of 67 will be eligible to make voluntary super contributions without needing to meet the work test.
Finally, the recent confirmation that there is no indexation of the $1.6 million superannuation caps from 1 July, 2020, but the almost guarantee of an increase from 1 July, 2021, firmly places the spotlight on advisers ensuring that contribution strategies for this financial year are carefully planned and managed to ensure clients have the ability to maximise the potential to boost their super.
Whilst there is some cross over between these measures, we will look at each of them separately.
THE WORK TEST EXEMPTION
Under current rules, a work test requirement applies in order for a member to make voluntary contributions to super after turning 65 years of age.
Generally, the work test requires that such a member needs to have been gainfully employed on at least a part-time basis during the financial year in which the contributions are made. A person is considered gainfully employed on a part-time basis during a financial year if the person was gainfully employed for at least 40 hours in a period of not more than 30 consecutive days in that financial year.
However, since 1 July, 2019, additional contribution eligibility criteria now allows someone who has not been gainfully employed, either on a full-time or a part-time basis during the financial year to still make a voluntary super contribution where all of the following requirements are satisfied:
- The individual met the work test in the financial year immediately prior to the year of the contribution;
- The member has a total super balance of less than $300,000 at the end of the previous financial year; and
- The member has not previously used the work test exemption in a previous financial year to make a contribution to any regulated super fund.
Whilst the $300,000 total super balance threshold is not subject to indexation, it is important to note that this work test exemption applies to voluntary contributions. It therefore can apply for both concessional and non-concessional contributions. And if available, not all amounts have to be contributed at once, but must be made in the course of the one financial year.
Importantly, this measure is already law, so can provide some assistance to clients this financial year who have already turned 65 and are no longer working.
The other issue to note is that once used, the work test exemption opportunity cannot be used in a subsequent financial year. However, if a client does qualify to use it, but chooses not to contribute in that particular year, it may remain available for another year (if the client qualifies again).
As an example, if Judith is 67 this financial year and has not (and cannot) meet the work test in 2019/20, but did work last financial year, she could access the ability to contribute to super this financial year (assuming her total super balance was below $300,000 at 30 June, 2019). However, if she doesn’t make a contribution, meets the work test requirements again in 2020/21, and then ceases to work again, she is potentially eligible to utilise the work test exemption in 2021/22.
THE WORK TEST DEFERRAL
Yet to be legislated, the work test deferral will mean that from 1 July, 2020, the requirement to meet the work test to be eligible to make a voluntary contribution to super will not apply until a member turns 65 – a two year deferral from the current requirements.
As a result of this deferral, it is also proposed to extend eligibility for the three year bring-forward rule around non-concessional contributions to the year in which a members turns 67, and to also extend the time frame for the receipt of spouse contributions to age 75. It is worth noting that with spouse contributions, whilst the need for the receiving spouse to be working to receive a spouse contribution will also move out to age 67 (if legislated) from 1 July, 2020, the work test exemption is not available for the receipt of a spouse contribution.
Whilst these changes seem relatively straight forward, it is the flow on opportunities and considerations that advisers will need to carefully navigate through, both for this year and next.
HOW MUCH SHOULD BE CONTRIBUTED THIS FINANCIAL YEAR?
The answer will always be “it depends” as it will rely on a number of factors, such as the potential ability to contribute in future years, and the availability of funds to make a contribution, but timing can also be important.
As an example, consider Fred turned 66 in October, 2019 and hasn’t worked this financial year. He had $295,000 as a total super balance at 30 June, 2019, after retiring from full time work in that financial year. The options for Fred include:
- An ability to make a $100,000 contribution under the work test exemption provisions. Depending on his income, he may be able to claim up to $25,000 as a deduction for classifying some of the contribution as a concessional contribution; or
- Not making any contribution this financial year and waiting to contribute next financial year. In doing this, he potentially will forego the opportunity to utilise the work test exemption as he has not met the work test in the 2019/20 financial year, and it is also possible that growth on his super balance may cause him to exceed the $300,000 total super balance by 30 June, 2020. Also, if the work test deferral measures are not legislated with a 1 July, 2020, start date, he will not be able to contribute under that option either.
However, if the proposed changes to the work test deferral are legislated (in time) with a 1 July, 2020, start date, then Fred could look to make his contribution next financial year, as the work test won’t apply until age 67. Provided he contributes before his birthday in October 2020, he won’t have to worry about the work test. However, if wants to contribute after that time, he will need to meet the work test.
Additionally, if Fred does contribute next financial year as a result of the work test deferral operating, he could contribute up to $300,000 utilising the bring forward provisions.
Or, if he has the funds available, he could consider both options, by making a $100,000 contribution this financial year under the work test exemption, and this still looking to make a $300,000 non-concessional contribution next financial year as a result of the work test deferral. Overall, this is an ability to now contribute $400,000 to super in the space of a couple of months for someone over the age of 65, all without the need to work.
For someone where the work test exemption is perhaps not in play as yet because of their age, but are approaching age 65, considerations will arise this financial year about how much to contribute this year as:
- By making a non-concessional contribution of no more than $100,000 this financial year may mean that the bring forward will be available in one of the next two years given the ability to now access until age 67, whereas triggering this financial year may place a limit on how much can be contributed; and
- With the total super balance threshold of $1.6 million expected to increase to $1.7 million from 1 July, 2021, deferring the trigger of the being forward may allow for additional non-concessional contributions in future years, or may allow a member who had already triggered the bring forward to potentially access it again (when combined with the work test deferral measure).
Beyond this, considerations around other opportunities such as recontribution and account equalisation strategies will need to be carefully monitored and, perhaps, reconsidered over coming months. The changes to the contribution qualification criteria (both current and proposed) expand the opportunities for clients to get more money into super close to retirement. However, careful consideration of the interplay of a range of measures will be required to ensure the opportunities are inadvertently restricted.
Bryan Ashenden is head of financial literacy and advocacy at BT.
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