Contributions at age 66 and 67
By Julie Steed, Senior Technical Services Manager
On 5 March 2020, the Government released draft legislation for consultation that intends to improve the flexibility to contribute to super for older Australians from 1 July 2020. The consultation period closed on 3 April 2020.
The changes were announced as part of the 2019 Federal Budget and were widely expected to be in place by 1 July 2020. However, given the tumultuous state of the Parliament, it is very unclear as to whether the legislation will pass by 30 June 2019. On this basis, it is essential that individuals understand what the current law is and only act on the proposals if the new law is actually passed.
The draft legislation issued for consultation proposes to amend superannuation rules to allow certain contributions to be accepted without the need to meet the work test and for the age limit for spouse contributions to be increased. The second limb of the legislation seeks to amend tax laws to allow access to the three year bring-forward rules for making non-concessional contributions.
Eligibility to contribute
Currently, only individuals under age 65 can contribute without needing to meet the work test. The work test requires that an individual is gainfully employed for at least 40 hours in 30 consecutive days in the financial year in which the contribution is made. The measures are intended to increase the age at which contributions can be made without meeting the work test from age 65 to age 67. If the measures pass, from 1 July 2020, people age 65 and 66 would be able to make contributions without meeting the work test.
The types of contributions applicable to the proposal include:
- salary sacrifice contributions
- personal deductible contributions
- personal non-concessional contributions
- small business capital gains tax contributions.
Currently spouse contributions can only be made for individuals from age 65 to 69 if the receiving spouse meets the work test. The measures also intend to increase the age at which spouse contributions can be made from age 69 to age 74. If the measures pass, from 1 July 2020, people aged 70 to 74 may be able to receive spouse contributions if they meet the work test.
Accessing the three year bring-forward rule
The measures intend to increase the age at which people can access the non-concessional three year bring-forward rules from age 64 to 66. If the measures pass, from 1 July 2020, people age 65 and 66 would be able to access the three year bring-forward rules subject to the existing total super balance threshold requirements.
For the 2019/20 financial year, only clients who were age 64 on 1 July 2019 are eligible to access the three year bring-forward rules. Clients also need to have a total super balance at 30 June 2019 of less than $1.4 million to access the full $300,000 bring-forward.
For individuals who turn age 65 in the 2019/20 financial year and who have the capacity to contribute more than $300,000, it may be advantageous to put plans in place to contribute $100,000 in 2019/20, $100,000 in 2020/21 and then $300,000 in 2021/22 but only if the legislation passes. If the status quo remains, the maximum of $300,000 this year is all that should be considered.
Tax and super law interaction
The interaction between the super laws regarding the eligibility to contribute and the tax laws regarding eligibility for the three year bring-forward rule remain widely misunderstood. Tax law tells us that a person who was age 64 on 1 July 2019 may contribute up to $300,000 in 2019/20 but super law tells us that if the contribution is made on or after their 65th birthday the work test must be met during 2019/20 – so, they must be gainfully employed for at least 40 hours in 30 consecutive days.
We regularly see people make contribution plans based on tax law, only to have them unravelled because they have not also considered super law and have realised too late that they were ineligible to contribute.
The potential improvements in super contribution flexibility will be welcomed if they are legislated but individuals should ensure they are only acting on the proposed changes if they actually become law.
You can track the passage of the proposed measures at the treasury website.
If you have any questions, or would like more information, please contact the IOOF TechConnect team on 1300 650 414.
The information in this section of the website is intended for financial advisers only and is not to be distributed to clients. It has been prepared on behalf of Australian Executor Trustees Limited ABN 84 007 869 794 AFSL 240023, IOOF Investment Management Limited ABN 53 006 695 021 AFSL 230524, IOOF Investment Services Ltd ABN 80 007 350 405, AFSL 230703 and IOOF Ltd ABN 21 087 649 625 AFSL 230522 based on information that is believed to be accurate and reliable at the time of publication.