Want a tax deduction on personal super contributions after 67? Be wary

Although new contribution opportunities up to 75 are exciting for most people, in this case the work test has to be met.

From July 1, there will be many opportunities to make super contributions after turning 67. Although there will still be contribution caps that might limit the amount contributed (sometimes all the way down to $0), anyone under 75 will be able to make contributions themselves or have contributions made for them by a spouse or employer. There is no longer any need to worry about the infamous “work test” that has historically applied to anyone over 65 (or more recently, 67).

Except in one case.

The work test will still come into play for anyone aged between 67 and 75 who wants to claim a tax deduction for some or all of the contributions they make to super personally.

It is a shame because getting a tax deduction for personal contributions can be incredibly handy for people who have stopped working, and so are not using up their usual cap for these contributions ($27,500 a year). That sweet spot between retirement and turning 67 has historically been a great time to transfer more into super by selling personal assets or even transferring them directly into an SMSF (rules permitting).

Since this often means capital gains emerge, a tax deduction for some resulting super contributions can be a great way of managing tax. It can also be a time when those with substantial assets in a family trust start drawing more money out (trust distributions) – again making tax deductions for super contributions handy.

Perhaps that is exactly why the government does not want to be too generous. So while there is no specific logic to leaving the work test in place for this tax deduction, it is at least a way of controlling the number of people who can have it after turning 67.

But what new challenges will come up now that many more people will be making contributions after 67?

Greater Flexibility

For those who meet the work test, probably none. That said, there will be some subtle changes. For example, the rule of thumb in the past has been to “make sure you meet the work test before making the contribution”. That’s because the work test used to drive whether the fund was allowed to accept the contribution. That won’t be a problem after July 1 – the fund will be able to accept the contribution no matter what (for anyone under 75).

The work test is only relevant for claiming a tax deduction for it. That means there’s a bit more flexibility here.

Think about Jane who turns 70 in August and wants to claim a personal tax deduction for super contributions in 2022-23. Jane just needs to make sure she meets the work test at some point during that year. But the precise timing doesn’t matter. For example, she could make her contribution in October and not meet the work test until June 2023. Or the other way around. Or she could make contributions regularly throughout the year and meet the work in May 2023. All of that will be fine.

But what happens if Jane makes her contributions thinking she will be fine when it comes to the work test, only to find that she’s not? Perhaps her health deteriorates and she can’t do the work she planned. Or the job she had lined up gets delayed until the next financial year. Or perhaps she just misunderstood the rules and thought what she was doing was enough to meet the work test, but it wasn’t.

Now what? In the old days, if she made a contribution but didn’t meet the work test, the trustee would be forced to give her the money back (effectively reverse out the contribution as if it had never happened). That was actually excellent for Jane – she didn’t get the contribution (or tax deduction) she wanted but at least she didn’t get penalised.

In the future, it won’t be quite so simple. Jane’s contribution in 2022-23 will be treated like a normal personal contribution (known as a non-concessional contribution). If she has already used up her 2022-23 cap on these contributions, she will have created an “excess”. Her super fund won’t be able to refund the money – it will have to wait until the ATO gives Jane a special determination.

Even then, the fund will have to refund the money to the ATO, not Jane. The ATO will take out some extra tax (there is a notional earnings amount added to the excess and these earnings are taxed), as well as any other tax debts Jane has, and give her what is left. It could all take time and be a lot more expensive than Jane expects.

Bear in mind that if Jane has more than $1.7 million in super at June 30, 2022, her cap on non-concessional contributions is actually zero. So, the whole contribution might be an “excess”.

And there’s another more subtle change – the ATO (rather than the fund’s auditor) will be policing the work test. The test itself hasn’t changed – anyone who wants to meet it needs to do at least 40 hours of paid work (volunteer work doesn’t count) in a 30-day period. But woe betide anyone who tries to manufacture a paid work arrangement to meet the work test – the ATO will be all over them.

This article was first published in the Australian Financial Review 11th May 2022.