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Added flexibility to contribute depends on law change

Sep 3, 2019, 15:56 PM

By Mark Ellem

Mark Ellem SuperConcepts SMSF expert

Key points

  • Proposal to extend work test age from 65 to 67
  • Certainty is required for contribution strategies
  • SuperConcepts calls on government to act swiftly

Those turning 65 this financial year may be entitled to put an extra $200,000 into super, if a proposed change becomes law. We call on the government to enact this change without delay, to remove the uncertainty for this group wishing to maximise their nest egg.

So, what is the proposed change?

This year’s federal budget proposed that from 1 July 2020, Australians aged 65 and 66 will be able to make voluntary super contributions, both concessional and non-concessional, without meeting the work test. Currently, this entitlement is only available to those under 65.

The proposal also extends the availability of the bring-forward arrangement, which enables up to three years’ worth of non-concessional super contributions in a single year (depending upon a person’s total super balance at the prior 30 June). Currently, the arrangement is available to people up to the age of 65. The proposal extends the equivalent age to 67.

What’s the benefit of the increase in the work test age?

In addition to being able to make personal contributions for an additional two years without having to meet the work test, the increase in the work test age from 65 to 67 provides an additional two years that an individual can utilise the standard $100,000 non-concessional cap, prior to triggering the bring forward rule in the year that they attain the work test age. This strategy does require the individual to have less than $1.4m in total super at 30 June prior to the year the bring forward rule is triggered to maximise the non-concessional bring forward cap of $300,000. However, even with a prior 30 June total super balance of at least $1.4m, but less than $1.5m, it provides for a maximum of $200,000 of non-concessional contributions.

Case study – Maggie’s situation

Maggie is turning 65 in November 2019, does not currently satisfy the work test, and nor will she in the future. Her 30 June 2019 total super balance is $900,000 and she has not triggered the bring forward rule in the preceding three financial years.

Under the proposed change, rather than having to utilise the bring forward rule prior to her 65th birthday, she can make non-concessional contributions as follows:

  • $100,000 at any time in 2019/20
  • $100,000 in 2020/21 (assuming her total super balance is less than $1.6m at 30 June 2020)
  • $300,000 prior to her 67th birthday in 2021/22 (assuming her total super balance at 30 June 2021 is less than $1.4m)

The end result would be non-concessional contributions totalling $500,000 for the period 1 July 2019 to 30 June 2022, compared to only $300,000 if the rules remain unchanged and Maggie makes the contribution before her 65th birthday.

If the work test age remained at 65, to make further non-concessional contributions in later financial years, Maggie would need to be able to satisfy the work test (given her total super balance, she would not qualify for the recently retired rule, which requires a person to have been gainfully employed in the preceding financial year and have a total super balance of less than $300,000 at the prior 30 June).

The uncertainty of the proposed change to the work test age

For Maggie, she is betting on the proposed changes becoming law from 1 July 2020, as announced. The risk is that the proposal doesn’t get passed, the start date is deferred, or the final version of the law differs from expectation.

Maggie has to make a decision prior to her 65th birthday in November 2019 as to whether or not to trigger the bring forward rule and either:

  1. make a total non-concessional contribution of $300,000, which effectively would be her last non-concessional contribution; or
  2. only make a $100,000 non-concessional contribution in 2019/20 with the assumption that the proposed change will become law and she can make further non-concessional contributions of $100,000 on 2020/21 and $300,000 in 2021/22.

How can the uncertainty be removed for Maggie?

The change to the work test age from 65 to 67 requires a change to a regulation. As a regulation, this would not require a Bill to pass both houses of Parliament, but a simple amendment to the regulation that would require being gazetted, allowing a 14 day objection period. However, it would also require a change to the bring forward rule, which resides in the 1997 Tax Act and consequently this change would require an amending Bill to pass both houses.

It’d be great for Maggie and others like her to see a swift resolution to the proposed changes.