Work test excludes some workers

work test common-law employees

New work test rules prohibit some workers from making super contributions as the new rules do not consider them to be common-law employees.

Recent changes to the work test will not apply for people who are not considered common-law employees, such as politicians and company directors, effectively preventing them from making contributions under the new rules, according to a superannuation technical expert.

Colonial First State head of technical services Craig Day noted the changes to the work test, which now resides in the Income Tax Assessment Act (ITAA) rather than the Superannuation Industry (Supervision) (SIS) Act, mean people outside the definition of a common law employee are no longer included.

He said the new work test rules in the ITAA have an age-based deductibility rule for those aged 67 to 74 under which they must satisfy the work test to be eligible to claim a deduction for a contribution, which includes being gainfully employed for 40 hours within a consecutive 30-day period in the year the contribution is made.

“Under common law an employee will generally be someone engaged by an employer under a contract of service where the employer controls what work the person does and how, when and where it is done,” Day told selfmanagedsuper.

“However, it’s important to note that some types of employment arrangements don’t technically come under the definition of a common-law employee. This includes company directors as the courts have defined a director to be an office holder and not an employee of the company.”

He observed the SIS Act applied an extended definition of employee to ensure people working under these types of arrangements were treated as employees for superannuation purposes, allowing them to use their work hours to meet the work test, but this definition has not been carried over into the ITAA.

“Therefore, only common-law employees will be able to count their hours worked towards meeting the work test,” he said.

“This means that people, such as company directors, that may have previously been eligible to make a contribution and claim a deduction prior to 1 July 2022 will no longer be able to do so as their hours will no longer count towards the 40 hours.

“Other people that also may be impacted by this change include other roles captured by the extended definition of employee.

“This includes members of federal parliament or a state or a territory parliament, local government councillors and people wholly or principally employed for their labour but who would not qualify as a common-law employee.”

According to Day the explanatory memorandum of the bill that introduced the changes did not give any indication the new rules intended to exclude these types of employees from being able to claim deductions for personal contributions and it appeared to be an unintended consequence.

“This is also supported by the fact that employers are entitled to claim a deduction for their employer contributions for their employees in these types of situations as the relevant section of the ITAA does apply the extended superannuation definition of employee,” he said.

“While it is hoped that this is an unintended consequence and that the rules will be amended, advisers may need to warn clients of this situation before they make any personal deductible contributions as they may not be eligible to claim a deduction for them.”

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