Expert SMSF insights
Changes to work test age and bring forward rule
By Anthony Cullen
On Thursday 18 June 2020 both Houses of Federal Parliament adjourned for the last time in the 2020 financial year. And with the adjournment, the hope that the changes announced in the 2019/20 budget would be enacted prior to the proposed starting date of 1 July 2020 vanished.
The announcements I refer to are part of the initiative by the Federal Government to provide greater flexibility for older Australians. The proposed changes to superannuation contributions for older Australians, include:
- Increasing the age at which the work test starts to apply for voluntary contributions from 65 to 67.
- Increasing the age at which the non-concessional ‘bring forward’ option cuts out from 65 to 67.
- Increasing the age limit for spouse contributions from 69 to 74
Earlier in the year there were calls from industry for the Government to act on these announcements sooner rather than later, to provide some certainty for those that might be impacted. On 5 March 2020, Exposure Draft Bills and Regulations were released with a four-week consultation period. Although the number of sitting days remaining after the consultation period was limited, there was hope that the changes would be implemented in a timely manner.
Thanks to the COIVD 19 Pandemic, Parliament and the majority of the country went into lockdown, and we feared our hopes of timely clarity had been dashed. We found a glimmer of hope when Parliament returned earlier than expected and we saw the introduction of the Treasury Laws Amendment (More Flexible Superannuation) Bill 2020 into the House of Representatives on 13 May 2020. The purpose of this bill is to legislate the amendments to the bring-forward rule provisions within Section 292.85 of the Income Tax Assessment Act 1997.
On 28 May 2020 a legislative instrument, Superannuation Legislation Amendment (2020 Measure No. 1) Regulations 2020 was registered. The purpose of this instrument is to amend sub-regulation 7.04(1) of SIS Regulation 1994 (as well as sub-regulation 5.03(1) of the Retirement Savings Account Regulations 1997). These changes would represent an increase in the age the work test starts to apply from 65 to 67. In addition, the increase in the age for spouse contributions from 69 to 74 is covered by this instrument. The instrument was gazette on 29 May 2020, thus providing changes as proposed from 1 July 2020.
Although changes to Regulations don’t require new legislation to be introduced to Parliament, legislative instruments generally need to be tabled in both houses within 6 sittings days of the instrument being registered. After tabling, there’s a 15 sitting days period in which a member of the House of Representative or a Senator may give notice of a motion to disallow the instrument. Should a motion of disallowance be raised, a further 15 sitting days period commences, during which the motion must be resolved or withdrawn. If this doesn’t occur, the instrument will be deemed to be disallowed.
This particular instrument was tabled in both houses on 10 June 2020. It is worth noting that despite the slim possibility of a disallowance of the instrument, the fact that it has been gazetted and will take effect from 1 July 2020 doesn’t change. That is to say the instrument becomes law until it is disallowed, should it come to that.
Adjournment of Parliament
Unfortunately, as of the adjournment of Parliament on 18 June 2020, we are no closer to seeing the tax law changes legislated, with the Bill still to progress from the House of Representatives. Further to this, neither House is scheduled to sit again until Tuesday 4 August 2020.
As for the legislative instrument, the changes will be law from 1 July 2020 but there is still the potential for it to be disallowed. Despite this, contribution strategies can be based on an increase in both the work test and spouse contribution ages. Post-18 June 2020, there remains nine sitting days in each house for a motion to potentially be raised which takes us to 25 August 2020. Although there is no suggestion this is likely to happen, a motion in the Senate (where one is more likely to arise) at the eleventh hour could see the process drag out to 1 December 2020, or the instrument being disallowed all together.
Making contributions early in the 2021 financial year
With legislation stalled, where does that leave those members in the 65 – going on 67 age brackets?
Consider the example of Jon, who retired when he was 64. He turns 67 on 15 July 2020 and has a Total Super Balance (TSB) of $800,000 as at 30 June 2020. He can take comfort in the fact that he does not have to satisfy the work test before his birthday to be able to make voluntary contributions. However, he needs to remember that the law hasn’t changed to enable him to use the bring forward rule yet. Acceptance of voluntary contributions by a super fund after he turns 67 will be subject to the work test.
From the super fund’s point of view, the trustees will be able to accept any contributions in accordance with sub-regulation 7.04(1) for those under the age of 67. With the repealing of sub-regulation 7.04(3) from 1 July 2017, there is no longer a mechanism for trustees to return contributions that exceed any fund-capped limits under provisions within sub-regulation 7.04(4). So, if Jon were to act on the proposed amendments and contribute $300,000 and the law doesn’t change, the fund is unlikely to be in a position to return the excess over the yearly cap of $100,000. Unless the ATO provides discretion for the Jon’s of the world to remove the excess amount, they will need to wait for the usual excess contribution determination process to follow it course.
There’s still a chance the change to the work test and spouse contribution ages will remain, if the bring forward rule changes are voted down in the Parliament. Not a good outcome, but it does highlight the different passages that must be taken for changes between Acts and Regulations, not to mention how much we take for granted that the superannuation and tax laws will be congruent in most of our dealings.
While everything appears to be pointing in the right direction, there is still a level of uncertainty for a small part of the population as to whether they can consider making contributions under the bring forward provisions.
A new opportunity
The concept of a withdrawal and recontribution strategy, or the idea of evening out member balances between couples, may not be new. However, these changes (assuming they do proceed) create an opportunity that has been limited in the past.
The first step to a withdrawal and recontribution strategy is meeting a condition of release to access your funds. This was achievable via a Transition to Retirement Income Stream (TRIS) but depending on your account balance, it had limited scope due to the cap on what you could access. For those who were still gainfully employed, having to wait until age 65 wasn’t of much use either given the limited opportunities to make contributions (work test and/or no bring forward rule).
Going forward we are in the unique situation where attaining age 65 remains a condition of release, and there is no work test to consider until age 67. Coupled with the potential to use the bring forward rule subject to TSB, the withdrawal and recontribution strategy should breathe new opportunities into evening out member balances and/or estate planning strategies within that two-year window.
Consider Jon’s wife Jane, who turns 65 on 8 July 2020 with a similar TSB and is also retired. Without any changes in the contribution acceptance and bring forward rules, she could have looked at withdrawing and recontributing $300,000 prior to her birthday.
Taking into account the proposed changes, she could consider changing the strategy to $100,000 in both the 2021 & 2022 financial years and then trigger the bring forward rule before she turns 67 in the 2023 financial year. Depending on the makeup of her interests and the cap limits in that year, we are potentially looking at an additional $200,000 tax-free component for Jane compared to the old rules.
Changes are afoot, and with change comes opportunities. However, you must be cautious when you take advantage of those opportunities, as we do not have concrete legislation to act on at this point in time.
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