We have great news for those contemplating retirement or those already retired.
The Federal Budget this week brought some great news for those who are in the pre-retirement phase or contemplating retirement over the next few years.
Note that this change is subject to being legislated – which is complicated by the imminent election.
Removing contributions restrictions for people aged 65-75
From 1 July 2017 people under the age of 75 won’t have to pass the ‘work test’ to be able to make superannuation contributions.
“From 1 July 2017, the Government will improve the flexibility of the superannuation system by removing the current restrictions on people aged 65 to 74 from making superannuation contributions for their retirement.”
“People under the age of 75 will no longer have to satisfy a work test and will be able to receive contributions from their spouse.”
“This will simplify the superannuation system for older Australians and allow them to increase their retirement savings, especially from sources that may not have been available to them before retirement, including from downsizing their home.”
This means that if you are aged between 65 and 75 and are looking to sell your family home in order to downsize, you no longer have to meet the work test to contribute the lump sum into your superannuation.
Under the current rules, people between the age of 65 and 74 are allowed to make concessional contributions only if they meet a strict work test. Anyone who is 65 or older to pass the work test must be gainfully employed for 40 hours over 30 consecutive days in the financial year that the contribution is made. To be gainfully employed a person must either have been employed or self-employed for gain or reward for 40 hours in a business, trade, profession, vocation, calling, or occupation. This means if a person is employed for 40 hours in a consecutive 30-day period, or is self-employed and earns income from working in the business for 40 hours, the work test is passed.
Years of case law has resulted in tight restrictions being placed on when a business is being carried on. To their detriment many property investors have learned that they are regarded as an investor rather than running a rental business. This is despite them maintaining properties and carrying out the duties of a rental agent. By being classed as an investor they do not pass the work test, even if they can prove they worked 40 hours in a 30-day period.
The work test also discriminated against people that choose to do unpaid volunteer work, which is often a lot more than the required 40 hours in a 30 consecutive day period. The unfairness of the current system was made worse as many people can satisfy the test without actually doing any work. The system could be easily bypassed. For example, when the super member has a friend that runs a business they can be put on the payroll without actually having to work.
Under the new rules, all individuals up to the age of 75 will be able to claim a tax deduction for personal super contributions. The change provides everyone under age 75 with an equal opportunity to contribute to superannuation and fully use the concessional contribution cap regardless of employment status. It may create greater opportunities for end of financial year strategies to manage tax liabilities where clients have available cash to invest. It also means employees will no longer have to make salary sacrifice arrangements with employers to gain tax concessions. Clients may be more inclined to limit employer contributions to just super guarantee (SG) contributions and claim personal deductions for additional contributions to avoid negative outcomes from lowering the cash component of salary packages.
Removal of barriers and the development of comprehensive retirement products were a key recommendation of David Murray’s financial system inquiry.
What does this mean for you?
If you are aged between 65 – 75 or will be entering this age bracket in the new few years, you could prepare yourself to take advantage of the proposed changes to the work test for those over 65 looking to place money into super. A door may open (subject to the legislation being passed) for those between 65 – 75 being able to contribute funds into super without having to satisfy the work test and claim a deduction.
In addition, the rules for making personal deducted contributions to super have been simplified to the extent that no tests apply to do this. Whatever your work status, you will be able to make a personal contribution to super (perhaps close to year end) and claim a deduction. And you will be able to do this until you turn 75 as the previous requirement to be working in order to contribute between ages 65 and 74 will also be removed.
All of our financial planners are experts in superannuation and retirement planning. To take advantage of these new rules, contact us today.