It is well known some important changes to SMSF contribution rules were made from 1 July 2020. From now on, only those wanting to contribute after turning 67 years of age (or have non-superannuation guarantee contributions made on their behalf) will need to meet a work test (or be eligible for the work test exemption). Previously the work test became relevant two years earlier, from age 65.
We have yet to see parliament pass the other component of these changes – moving the deadline for commencing a non-concessional contribution bring-forward period to the 30 June after the member turns 67 (rather than 65).
At this stage, most people are optimistic this change will be passed when parliament sits again in August and be backdated to 1 July 2020. But if this year has shown us anything, it is how quickly things can change in a couple of months.
The new contribution rules we do have (no work test until age 67) present several opportunities and some traps.
Firstly, it is interesting to view this through the lens of what has not changed.
There have been no changes to:
- the work test itself – this still requires gainful employment (generally paid work) for at least 40 hours in a period of 30 consecutive days. There has been no change to the timing requirements for this test either – it must be met before the contribution is made, but in the same financial year,
- preservation rules – so these days, anyone can withdraw their superannuation as soon as they reach 65 and yet still make contributions, and
- downsizer contributions – these still start from age 65.
The combination of all three plus the new rules (assuming the bring-forward adjustments are legislated as promised) may mean we see clients making the largest contributions of their lives between 65 and 67. It will certainly make recontributions easier.
But for those looking to use both these new rules and the ability to make work test exempt contributions, there are potential traps to consider. These are the rules that allow those with small total superannuation balances, under $300,000 at the previous 30 June, to make contributions for one more year after they meet the work test.
In 2020/21, for example, this would mean someone who retired last year, say aged 68, and had less than $300,000 in super at 30 June 2020, could continue to make contributions all year in 2020/21.
Work test exempt contributions were first available in 2019/20 and apart from the $300,000 limit on the total superannuation balance, they come with one additional restriction – they are only available once. This introduces two potential traps.
Firstly, be careful with the client who used the work test exempt contribution rules last year, say, when they were 66. In 2020/21, until they reach 67 in, for this example, October 2020, they will be able to contribute again thanks to the new work test rules.
If they meet the work test in December 2020, they will also be able to contribute from January to June 2021 despite being over 67. But doing so will not entitle them to use the work test exempt contribution rules in 2021/22 because they have already used their one opportunity in 2019/20.
Secondly, be careful with clients who are still working and thus meeting the work test every year, but contribute early in the year. They may use their one opportunity to take advantage of the work test exemption accidentally.
Consider a 68-year-old client working 10 hours a week. They will meet the work test after their first month of work. But a non-concessional contribution made in July will be made before the work test is met. It will actually only be legal if they are eligible for the work test exempt rules, that is, they had less than $300,000 in super at the previous 30 June and have not used the rules before.
And if they are eligible for these rules, they will have been deemed to have used their one opportunity to do so. Had they waited until August to make the contribution, they would have another year left to contribute under the work test exemption.
As always, it pays to watch the contribution rules carefully. This is particularly true today when we have three different changes affecting those around age 65 in the past two years that were all introduced at different times – downsizer contributions from 1 July 2018, work test exempt contributions from 1 July 2019 and now the extension of contributions without a work test up to age 67 from 1 July 2020.
