How work test changes will affect your superannuation

Over the past decade changes to superannuation rules have often led to backward steps for those wanting to be self-funded in retirement. A reduction in contribution caps, limits to tax-free pensions and increase in the age to access super have all added to the trouble.

But there have been some ­recent changes in the opposite ­direction that encourage people to add to their superannuation ­accounts. The most recent is the increase in the work test exemption, which now sits at age 65 and is soon due to increase to 67.

Jane Hume, Assistant Minister for Superannuation, Financial Services and Financial Technology, has confirmed the work test exemption would be extended to 67 years before June 30.

So what does this mean for those approaching their mid 60s? Antoinette Mullins, certified financial planner with Beyond Today, says: “This would be a big game changer for retirees, as there’s an extra two years opportunity for retirees to boost their tax-free retirement funds.

“I have three clients who have fingers and toes crossed that this goes through as it would mean a worry-free retirement for them.”

Under current rules, if you are under the age of 65, you can make an after-tax contribution into super of $100,000 per financial year, and up to $300,000 if you trigger the bring-forward provisions. However, after attaining age 65, everything changes.

To be eligible to contribute after-tax money into super beyond 65, you need to meet the work test, which means you need to be gainfully employed and work 40 hours in a consecutive 30-day period in the financial year you wish to make the contribution. Whether you work part-time, casual, full-time or self-employed, that’s up to you, the main thing is hitting the 40 hours requirement over a 30-day period.

Another nuisance is understanding what constitutes “gainfully employed”.

You have to be rewarded via receipt of remuneration such as salary, wages or business income for the work you do. Unpaid and charity work does not meet the “gainfully employed” definition.

Lastly, under current rules, after 65 you cannot trigger the bring forward provisions, which means your maximum contribution in any single financial year is limited to $100,000.

Some people aged 64 are holding back on making after-tax super contributions until the new rules are formalised. The rationale is that rather than make a last big contribution of $300,000 at age 64, they are waiting for the government to confirm the increase in work test exemption age to 67, which will let them make a $100,000 contribution at 64, another $100,000 at 65 and a final $300,000 contribution at 66. In other words, by timing this change right, someone who is 64 can get an extra $200,000 of after-tax money into super.

Another positive change to super has been around the downsizer contribution that was introduced on July 1, 2018.

Mullins says: “If the work test age extension to 67 is used well, in conjunction with the home downsizer contribution strategy, there’s some excellent opportunities.

“With home prices in strong recovery, the increased valuations will see pre-retirees well set for retirement. A 65-year-old now selling their home can put $300,000 in super through the downsizer contribution.”

There are some requirements to be met for the downsizer contribution, such as being at least 65 and having lived in the home for at least 10 years. There is also a risk that your access to the pension could be reduced if you use this scheme, so plan carefully.

And there is another super contribution change that has not generated much attention. This is the ability for people over age 65 to make a contribution into super even though they did not meet the work test. Touted as the work test exemption for low superannuation balances, if you are retired and over 65 but met the work test in the previous financial year, you are able to contribute $100,000 into super as long as your super balance is less than $300,000.

This is a great way for people with low super balances over 65 to get a bit more money into the tax-free superannuation environment in the financial year after they retire.

The final change worth noting is the “catch-up” rules on concessional contributions have now commenced. From the 2018-19 financial year, unused amounts under the pre-tax $25,000 cap can be rolled forward and used for up to five future financial years.

As such, if only $5000 was made as a concessional contribution in the 2018-19 financial year, for example, the unused $20,000 rolls forward into the 2019-20 financial year, making this year’s pre-tax cap $45,000.

Superannuation is still the most tax-effective environment for those in retirement and namely, the tax-free account-based pension of up to $1.6m.

Understanding what levers you can pull to get more money into super from inheritances, property sales or otherwise just cash savings can lead to notable tax savings throughout our lifetime. One big caveat though, is the government could make retrospective changes that reduce the attractiveness of superannuation — something that has been a proven risk in the past.

James Gerrard is principal and director of Sydney financial planning firm www.Financial Advisor.com.au