Introducing the new work test

Summary: The work test has changed, but these changes slipped under the radar. You could be much better off. 

Key take-out: Recently retired workers could now dump a extra few hundred thousand into their super accounts.

Recently retired workers will be able to dump up to an extra $425,000 into their super accounts following a change of heart by the Federal Government.

The change to the work test rule is a major opportunity for some workers approaching retirement, particularly those with significant assets outside of super, including investment properties.

The newly announced change means some workers will be able to use the three-year pull-forward rule to put up to $300,000 into super the year after they retire.

It was previously announced they would be able to make a tax-deductible concessional contribution (CC) of up to $25,000, plus use the concessional contribution catch-up rules to put in up to a further $100,000.

Unfortunately, the eligibility criteria will restrict many from maximising this opportunity.

To be eligible, the member will need to have less than $300,000 in super at the start of the financial year in order to make the non-concessional contributions (NCCs) of up to $300,000. This will be judged using the total superannuation balance (TSB) rules, which includes amounts in defined benefit schemes. It will also be limited to those aged between 65 and 74 at the time they retire.

The new rules kick in on July 1, 2019 as an extension of a package of changes announced in this year's budget to allow Australians to make concessional contributions in the year after they retire.

Under current rules, a worker who retires after the age of 65, can only make concessional and non-concessional contributions in the year they retire, if they have met the work test (working 40 hours in a 30-day period during a financial year).

From next year, retiring workers (65-74) will be able to make contributions in the year they retire, plus the following financial year after they last met the work test.

For example, if a 68-year-old was to retire on October 1, 2019, they would be able to make their regular contributions of $25,000 (concessional) and $100,000 (non-concessional) during FY19-20, as they would have met the work test.

However, they would also be able to use the work test rule exemption in FY20-21 to make further contributions of up to $125,000 (under the catch-up rules for CCs) and up to $300,000 (NCCs).

Using the catch-up rules allows members to contribute unused concessional contributions for up to four previous financial years.

Therefore, if a member has made contributions of $10,000 in each of the previous four years, they would be able to contribute up to $60,000 (four years of unused $15,000 of CCs), plus the current year's limit of $25,000.

Note: Concessional contributions include Superannuation Guarantee Contribution (SGC) payments from your employer, plus other contributions that have been claimed as a tax deduction.

Getting the contributions into super will assist in creating a tax-free income stream with a super pension, but there are wider benefits to the new rules.

Those finishing up with work often push back asset sales (such as property and even shares) until after they have retired, because the capital gains tax would be higher if it was done in the same year as they retired.

However, if they were over 65, they were often left with little way of getting the money into super, because of the work test restrictions.

Now, those who meet the rest of the criteria, might be able to finish work in one financial year, sell their investment property in the following financial year, and still be able to make considerable contributions to super, including up to $125,000 in catch-up CCs, helping to reduce their capital gain on the sale of a property.

This could potentially work for both members of a couple. That would double the potential limits.

The $300,000 TSB limit for those interested in using the new work test exemption will exclude many people. Industry had argued it should have been $500,000 to match the limit for using the five-year catch-up provisions for making concessional contributions (for more information on the catch-up provisions, see this column).

It will also likely mean that anyone who did load up their super with the three-year pull-forward rule prior to turning 65 is also unlikely to be able to use it.

The TSB will be measured at the start of the financial year and will only be tested then. So, if your TSB was to start at $295,000 on July 1, but grew to $330,000 by fortunate investing in the year before you made your contributions, the contributions could still be made.

However, the extra opportunities provided by the change to NCCs, and using the pull-forward rule, will be of considerable benefit to some with very low super balances.