For self-managed super fund trustees, July 1 will usher in a new era. For the first time, individuals aged between 67 and 75 will no longer need to satisfy a work test to make voluntary super contributions.
Part of a package of superannuation reforms introduced in the federal budget last year and legislated in February, this is designed to give older Australians greater flexibility to top up their superannuation.
This reform acknowledges that many people retiring today have been receiving compulsory superannuation only since 1992. This initiative will allow them to continue making voluntary contributions long after they have retired.
So, what does this mean in practical terms? First, the definition of a “voluntary contribution” is not limited to salary-sacrifice. It can also include small business capital gains tax (CGT) contributions and personal injury contributions, with the former particularly relevant to business owners.
Second, this change has implications for contribution caps. In all the fuss about removing the work test, it is important to remember not to exceed the contribution caps. Otherwise, you may be liable for additional tax on the excess contributions.
These caps continue to apply regardless of your age or employment status. It is also worth noting that if your total superannuation balance is greater than or equal to $1.7 million at June 30, 2022, your non-concessional contributions cap for 2022-23 is zero. That means that if you make any non-concessional contributions in 2022-23, they will be treated as excess non-concessional contributions.
Two options available
If you made excess non-concessional contributions, the ATO will send you a determination explaining that you can either elect to withdraw the excess portion and pay tax on the deemed earnings associated with the excess at your marginal tax rate, including the Medicare levy (option one), or you can retain the excess amount in your fund and pay 47 per cent tax on the entire excess amount (option two) – hardly an enticing option.
Option one is the default if you receive a determination and don’t choose within 60 days because this option attracts the least amount of tax.
Third, it is important to note that contrary to popular belief, the work test has not been completely removed from the legislation. From July 1, individuals between the ages of 67 and 75 will still need to satisfy the work test to be able to claim a member contribution as a tax deduction.
To pass the work test, the member must have been gainfully employed for at least 40 hours over 30 consecutive days in the financial year in which the contribution is made. There is no requirement for the work test to be met before the contribution is made. This means the work test can be met in the same financial year, but after the contribution is made.
Removing the need, regardless of your age or employment status, to satisfy the work test when making voluntary superannuation contributions is arguably the most important superannuation reform from the 2021 federal budget. But there were other changes that also take effect on July 1 that trustees need to be cognisant of and may need to get advice on. Downsizing is probably the most relevant.
The law has been amended to reduce the eligibility age to make downsizer contributions into superannuation from 65 to 60. This change, combined with the proposals regarding the removal of the work test and ability to use the bring-forward rule later in life, will broaden the ability of SMSFs to contribute proceeds to superannuation.
It improves the flexibility for Australians to contribute to their superannuation savings and may encourage people to downsize sooner and increase the supply of family homes.
Remember, too, a downsizer contribution – it’s a one-off, applying only to the family home – does not count towards any of the contribution caps, meaning it can be made even if a person has a total superannuation balance exceeding $1.7 million or if they don’t meet the work test requirements.
In addition, a partner, provided they are 60 or older, can also make downsizer contributions to their own super of up to $300,000 from the sale proceeds even if they are not an owner of the property.
Written by John Maroney, CEO, SMSF Association
First published in the Financial Review on18 May, 2022.