Changes to the work test – what do they mean for you?
What is the work test?
Making superannuation contributions is historically connected to employment. Broadly speaking, it represents savings by employees and
the self-employed for their eventual retirement from work. When compulsory superannuation was first introduced in a broad way in the
1980s, it was as a result of the “Accord” by the Hawke government under which employees gave up a pay rise in favour of a then 3%
contribution to super. The Superannuation Guarantee legislation evolved from that Accord, and the rate of contributions for employees
has grown to 10%.
The work test requires that a person making or receiving contributions into his or her superannuation fund works at least 40 hours in a 30 day period in the year in which the contribution is made. Over the years, the work test has been gradually diluted and narrowed, to enable more access to super for more people. From 1 July 2022, the work test applies as follows:
- Up until age 67, no work test has to be satisfied for any contributions
- From 67 to 75*, no work test has to be satisfied if the contribution is a non-concessional contribution (ie no tax deduction is claimed in respect of that contribution)
- From 67 to 75*, the work test has to be satisfied if the contribution is a concessional contribution (ie a tax deduction is claimed).
* The actual age limit is the 28th day of the month following the month in which the person turns 75. For example, if Jerry turned 75 on 1 May, he would have until 28 June to make either a concessional or non-concessional contribution, and if he wanted to claim a tax deduction for his contribution, he would have to satisfy the work test.
Note also that there is no age limit on superannuation guarantee (SG) contributions. These can be paid beyond age 75.
The change that occurred on 1 July 2022 allows people to make non-concessional contributions without meeting the work test. This means
that you can top up your super with any funds that you have outside your fund up until age 75, even after your retirement. For
example, a person may receive an inheritance later in life, and (subject to any contribution limits), that inheritance could be contributed
to super and benefit from the low or tax free super environment.
With the change to the work test comes a change in the way it is being administered. Up until 30 June 2022, it was the
responsibility of superannuation fund trustees to confirm whether a person was eligible to make a contribution. This was usually
achieved by asking a person over the applicable age to declare whether or not they worked at least 40 hours in a 30 day period in that
financial year. If the trustee of the fund subsequently discovered that a contribution could not have been made because the work test
was not satisfied, it was obligated to refund the contribution to the person. That is, if a mistake was made, there was no issue in
effectively “undoing” the contribution.
From 1 July 2022, the Australian Taxation Office (ATO) will administer the work test, which we understand will involve a person declaring in
their individual return that the work test has been met.
If an error has been made, or if the ATO decides that a work test has not been met, it may then disallow a claimed deduction for a
contribution. This will turn a concessional contribution into a non-concessional contribution. As non-concessional contributions
can be made up to age 75 without meeting the work test, there could well be no basis to refund a contribution incorrectly made.
Although this would not be an issue for many, wealthier Australians with more than $1.7 million in super have a non-concessional contribution cap of nil, so the consequence of a disallowed concessional contribution is an excess non-concessional contribution, with associated potential tax penalties.
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