ATO, Regulation, Superannuation

Work test anomaly addressed

Work test

An anomaly that arose from the most recent amendment to the work test has been rectified after the release of a new legislative instrument by the ATO.

The ATO has issued a legislative remedy to address an anomaly that arose when changes that were made to the work test requirement resulted in a significant unintended consequence.

The most recent amendment to the work test came into effect on 1 July 2022 and meant only individuals between the ages of 67 and 75 who are looking to claim a tax deduction for a personal superannuation contribution now need to satisfy this requirement.

In order to execute this change, the work test requirement is now governed by the Income Tax Assessment Act 1997 (ITAA) instead of the Superannuation Industry (Supervision) (SIS) Regulations (SISR) as it was previously.

Unfortunately, the ITAA’s definition of employee differed from that of the SIS Regulations, creating a situation where certain individuals would have been excluded from using the work test to receive a tax deduction for a personal super contribution.

To rectify this anomaly, draft Legislative Instrument 2023/D11 has now been released.

“The term ‘gainfully employed’ is defined in subsection 995-1(1) of the ITAA 1997 to mean ’employed or self-employed for gain or reward in any business, trade, profession, vocation, calling, occupation or employment’,” the ATO said in Explanatory Statement 2023/D11.

“The ‘work test’ that previously existed in the SISR and the RSAR (Retirement Savings Accounts Regulations) also relied on an identical definition of ‘gainfully employed’. But a critical difference is that both the SIS Act and the Retirement Savings Accounts Act 1997 (RSA Act) contain an expanded definition of employee.

“Subsections 15A(2) to 15A(10) of the SIS Act and subsections 19(2) to 19(10) of the RSA Act capture a range of persons as employees who may not otherwise be common law employees (such as company directors, constitutional or statutory office holders, parliamentarians and members of the Australian Defence Force).

“By contrast, there is no definition of ’employee’ in the ITAA 1997. It takes its ordinary common law meaning and there may be some people who were previously able to claim deductions (because they fell within the expanded definition of employee in the SIS Act and the RSA Act) but are not ‘gainfully employed’ for the purposes of the ITAA 1997 because they are not common law employees or self-employed.

“This instrument resolves this issue. It modifies the operation of subsection 290-165(1A) so that persons aged 67 to 75 who are an employee under subsections 15A(2) to 15A(10) of the SIS Act are capable of meeting the ‘work test’ if they meet relevant criteria. The modification provides certainty for these individuals by ensuring their eligibility to claim these deductions is unaffected by the 2022 amendments.”

The SMSF Association noted this rectification action will be of particular comfort to company directors who were at risk of failing the work test as the performance of their duties would not have been considered gainful employment under the strict ITAA definition.

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