08 February 2019
By Colin Lewis
The Australian superannuation system is designed around saving for retirement.
The ‘sole purpose test’ – a cornerstone of super law that drives this position – ensures that a super fund is maintained for the purpose of providing benefits to members upon their retirement, or attaining age 65, or for beneficiaries if a member dies.
So, apart from a recent deviation where the Government allowed measures to address housing affordability to creep into the system with the First Home Super Saver Scheme and ‘downsizer contributions’, getting money into (and out of) super centres around retirement and the arbitrary ages of 65 and 75.
Existing contribution rules
Generally, once you are aged 65 or more and retired you cannot put any more money into super.
Currently, to make a personal contribution from age 65 to 74, you cannot be retired and must meet a ‘work test’. It also applies to voluntary employer contributions made on your behalf, e.g. salary sacrifice contributions.
The logic is that you haven’t retired and are still saving for it.
The work test requires you to be gainfully employed for at least 40 hours within 30 consecutive days during the year in which you contribute.
If you’re aged 74, then you only have up until 28 days after the end of the month in which you turn 75 for the trustee to receive your contribution.
The work test and age restriction don’t apply to mandated employer contributions – i.e. Superannuation Guarantee contributions and contributions made under a law or industrial agreement – and downsizer contributions.
You may be eligible to make a downsizer contribution if you sell a home that you or your spouse owned for a continuous period of at least 10 years and are aged 65 or more.
A change to the contribution rules coming into play from 1 July 2019 helps people with limited superannuation to top up their retirement savings without having to satisfy the work test, called the ‘work test exemption’ (WTE).
The WTE allows people aged 65 to 74 with a total amount in the super system – ‘total superannuation balance’ (TSB) – of less than $300,000 at the previous 30 June to make voluntary contributions where they do not meet the work test, provided they satisfied it in the financial year prior to the one in which the contribution is made. In addition, the WTE can only be used once, so you cannot have contributed previously under this exemption once up and running.
Say you’re aged 66 and retire this financial year, i.e. in 2018/19, you can still contribute next financial year, i.e. in 2019/20, despite not working next year.
It’s important to note that the contribution caps continue to apply.
The concessional contributions (CCs) cap is currently $25,000 a year.
The non-concessional contributions (NCCs) cap is $100,000 a year or, for people under age 65 at any time during the financial year, they can bring-forward up to two future years allowing them to contribute up to $300,000. NCCs cannot be made if your TSB is $1.6 million or more.
One major change to the WTE since announced in the 2018/19 Budget and draft legislation introducing it, concerns the bring-forward rule. Originally, NCCs made under the WTE could not be used to trigger the bring-forward rule. However, this is no longer the case and it’s possible for people aged 64 at 1 July of a financial year, to use the WTE to make NCCs up to $300,000, subject to their TSB.
The WTE can also be used in conjunction with the rolling 5-year carry forward of unused CCs cap. This measure commenced from 1 July 2018 allowing people to carry forward unused CCs cap amounts provided their TSB is less than $500,000 at the previous 30 June.
On 1 May 2019, Bert retires and will not work in 2019/20. He turns 65 on 1 October 2019.
On 30 June 2019, his TSB is $295,000 and he has not made NCCs in the last two financial years.
In 2019/20, Bert can make CCs of $25,000 and NCCs of up to $300,000 by triggering the bring-forward rule. He can do this either from 1 July to 30 September 2019 when under age 65 per the current rules, or from 1 October 2019 to 30 June 2020 under the WTE.
The WTE is not available to people who fully retire well before age 65, as the work test must be satisfied in the financial year preceding the financial year in which the contribution is made.
If Bert had retired on 1 May 2018 instead and did not work in 2018/19, then in 2019/20, he can still make CCs of $25,000 and NCCs of up to $300,000 but can only do this from 1 July to 30 September 2019 when under age 65. From 1 October 2019, he is ineligible for the WTE.
On 1 August 2019, Marlene retires. She turns 65 on 1 October 2019.
On 30 June 2019, her TSB is $150,000 and she has not made NCCs in the last two years.
Marlene meets the work test in 2019/20 and is eligible to trigger the bring-forward rule, but only has available funds of $110,000 to contribute to super.
In 2020/21, Marlene can contribute the balance of $190,000 under the WTE providing her TSB on 30 June 2020 is less than $300,000.
The WTE is commendable, but restricting availability to it based on your TSB is a shortcoming and appears overkill. The amount that can be moved into the tax-free retirement phase is already subject to a $1.6 million transfer balance cap and NCCs are conditional on a $1.6 million TSB test and limited to $100,000 from age 65.