Superannuation: Removal of the work test and associated planning benefits
There have been many changes to Superannuation over recent years however, one change that has slipped under the radar somewhat is the removal of the work test. Prior to 2020 if you wanted to make a contribution to Superannuation after age 65 you had to meet the worktest – this meant that you had to work for 40 hours over any consecutive 30 day period once in the financial year. In July 2020 this was increased to age 67 thereby allowing contributions to be made up to that age without the requirement of meeting the worktest.
As from July 2022 there is no requirement to meet the worktest for anyone up to age 75.
This now provides a huge opportunity for many retirees to get further funds into Super where they may not have been previously eligible. The only other option which was available for retirees after age 65 was the governments downsizers contribution – which still remains, and is more widely known, however this ofcourse requires the sale of a home.
So for retirees with additional funds outside of Super who were over 67 and unable to meet the worktest, they were unable to contribute these funds to Super unless they were downsizing their home.
The main benefit of this change is providing the opportunity of moving assets from a potentially taxed environment into a concessionally taxed environment and then potentially into a non-taxed environment, if held in pension phase. In the past if retirees had received some additional funds, by way of an inheritance for example, and they were over the age limits then these funds had to be invested in another name – potentially incurring tax.
The other opportunity this now creates is the ability to utilise a recontribution strategy for those under age 75 who have funds in Super. While funds held in pension phase are tax free to the recipient and the earnings are tax free aswell – there is potential tax payable if the Pension account was paid out as a death benefit to a non-financially dependant beneficiary. This is because pension funds are made up of taxable and non-taxable components – depending on how the funds were originally contributed. Any taxable component will attract 15% (plus medicare levy) when paid as a death benefit to a non-financially dependent beneficiary. When funds are contributed as a non concessional contribution they form part of the non-taxable component. So there is the potential for retirees to withdraw funds from their pension account and then recontribute it back to change it from taxable to non-taxable. (dependant on whether the fund offers this option).
The annual non-concessional contribution cap is $110,000 – however using the ‘bring-forward’ rule there is opportunity to bring forward up to 3 years of contributions to allow for up to $330,000 to be recontributed in one go. That could potentially reduce any tax on the payout of a death benefit by $56000. For a couple that would represent an opportunity to recontribute $660,000 and save over $100k in potential tax in the future. This strategy does require some consideration as there are potential transaction costs and time out of the market – and not every pension fund has $330k in cash just laying around, so multiple withdrawals and recontributions may be required. However, it represents a great opportunity for retirees when considering their Estate Planning.
We recommend you speak to a qualified financial planner to discuss if this would be in your best interest.