Tax with Max: explaining the over 65 work test

We explain the rationale behind the work test that determines whether over 65s can continue to voluntarily contribute to super.

Summary: The work test for over 65s is designed to prevent wealthy individuals from continuing to transfer wealth into their super funds and gain that tax advantage while they are retired. The 40-hour per week threshold is calculated by taking into account the rules that determine whether someone aged over 60 is retired.

Key take out: While we can’t see any government loosening the restrictions on the work test, there is currently no recognition of voluntary work to meet the test. Revising this could address the problems many charitable organisations face when getting people involved in unpaid work.

Key beneficiaries: SMSF trustees and superannuation shareholders. Category: Superannuation.

Behind the over 65 work test

The over-65 work test rule has always puzzled me.  I put in a submission to the Murray Inquiry about this very rule calling it just plain ‘silly’.  However, I have never found where it came from and why it is the 40 hours in 30 days or any other hours in so many days. Can you help?

Answer: The debate about how much superannuation tax concessions have a negative impact on the economy is a good indicator of why we have the work test. Superannuation is also meant to be a retirement asset that has accumulated while someone is working, and that provides an income after they have retired.

If there was not the 65 year age limit on someone making super contributions, unless they are regarded as working by meeting the work test, wealthy individuals could transfer even more money from privately held investments into the tax advantaged superannuation system during retirement.

Given that there is already a lot of debate about the extra tax advantage that high income earners receive from the superannuation system, I cannot see any government loosening the restrictions on contributions being made for people who are 65 and older.

As to why the 40 hours was chosen as the limit I believe that this could relate to the test that determines whether someone who is under 60 has retired. Under this test, a person is regarded as retired if they do not intend to work more than 10 hours a week. Hence over a month this translates to 40 hours.

One of the major failings of the work test has is that there is no recognition of voluntary work to meet the test. If a strict test was introduced, that required a certificate from a charity or other benevolent society stating the number of hours of voluntary work, the problems facing many of these organisations in getting people to do voluntary unpaid work could be solved.

Whose name should my investment property be in?

I have just bought an old house for $1.03 million adjoining my investment property. Both blocks are 725 SQM and this will allow me to build six 3-bedroom town houses. Should I keep the new property in my personal name or own it jointly with my wife? The existing property adjoining the new one is in my name.

Answer: The answer to your question depends on a number of factors. The first factor is what amount of profit is expected to be made on the sale of each of the townhouses, and over what period of time the townhouses would be sold.

If someone in this situation had taxable income from other sources such as employment or a business, which would result in tax being paid on the profit on the sale of the townhouses at the higher marginal tax rates, and their spouse had little or no taxable income, the whole of the new property should be purchased in the spouse’s name.

If they were then able to control the sale of the townhouses so the taxable gain is spread over a number of years, and had very little other taxable income, they may not be disadvantaged if they purchase the new property in their own name.

In addition to the capital gains tax considerations, also consider what impact the GST would have on the profit made and the tax paid. This situation would be considered as a profit undertaking or venture, and as the turnover of this venture is greater than $75,000, one would need to register for GST for this project.

Because this involves building new residential properties, that will more than likely be sold and never rented, whatever is received as a selling price for the townhouses will have to include GST and that reduces the profit made.

There are number of tax planning considerations that need to be considered, such as whether a better overall tax result might be achieved by holding the townhouses and renting them out for a period of five years, which should result in no GST being payable.

You should seek professional advice from an accountant that specialises in this area, as there are a number of steps that you can take to reduce the impact of income tax and the GST. One of these would be to sell the townhouses using the margin scheme.

Corporate vs. individual SMSF trustees

I have read as much as I can on a corporate trustee versus individual trustees for an existing fund. There seems no doubt that when establishing a new super fund one would always use a corporate trustee. Then all assets would be in the corporate trustee name etc.

However this was not done when myself and a friend established our funds and we have to deal with that. I act as the second trustee for my friend and he is the second trustee for mine.

My friend is now very unwell and has moved to wind up his fund. For my fund I have the choice of obtaining another individual trustee or going to a corporate trustee. My strong feeling at the moment is to have my daughter appointed as an individual trustee to replace my friend.

I think that this will be my best option as all of the investments are in my name with the super fund being clearly shown as the owner, and there is no mention of the other trustee. The exceptions to this are the two bank accounts. Hence if my daughter becomes a trustee there would be no need to change the name of those holdings.

Over time my plan is to reduce the number of holdings then at a future stage convert to a corporate trustee when it would be more manageable. What do you think will be my best option?

Answer:  While I can’t provide individual advice in this area, here are some things to consider for someone in this situation. It is interesting that most of the investments of the super fund in this scenario only show one person as the sole trustee. There must have been a very switched on auditor here, as most would force SMSFs with two trustees to have the name of the other trustee shown on the ownership documents.

This is because the ATO has a policy that requires the names of all trustees to appear on ownership documents for an SMSF. In actual fact there is no legal requirement under the superannuation regulations or income tax act that require this, and therefore the ATO and auditors cannot strictly enforce this.

I think the best option for a situation like this will be to appoint a company now to take over as trustee from the initial trustees. This would make the fund holder the sole director and shareholder of the trustee company. The bank accounts would either have the name of the trustee changed to the company or new ones set up in the trustee company’s name.

Someone in this situation would draw up a document that states that they will act as custodian for the superannuation fund and the new trustee, and all future investments would be purchased in the name of the company. Before taking any action you should seek advice from an accountant that specialises in this area.


Max Newnham is a partner with TaxBiz Australia, a chartered accounting firm specialising in small businesses and SMSFs. Also go to www.smsfsurvivalcentre.com.au.

Note: We make every attempt to provide answers to readers’ questions, however, answers are of a general nature only. Subscribers should seek independent professional advice for more in-depth information that is specific to their situation.

Do you have a question for Max? Send an email to askmax@eurekareport.com.au.