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Meeting the work test for contributions

I’ve had a paradigm shift! Just when I thought I could confidently predict the ATO’s view on meeting the work test to make contributions, they have come back and surprised me!

Let me explain. I have been assisting a client where the ATO wants to charge her excess contributions tax. My client is over the age of 65 and at the time she made the contribution, she had not met the work test. My argument was that as she had not met the work test at the time she made the contribution, the trustee should not have accepted the contribution. However, the ATO has taken the view that as she has an SMSF and is self-employed, she would have known that she would satisfy the work test at a later date in the financial year. I did not see that coming!

The need to be ‘gainfully employed’

The timing of contributions has caused a great deal of confusion for SMSF trustees, members and industry professionals. The superannuation law states that once an SMSF member is aged 65 or over but is less than 75, they can only make superannuation contributions into their SMSF if they are gainfully employed on at least a part time basis during the financial year in which the contributions are made.

The definition of ‘gainfully employed’ under the superannuation law means to be employed or self-employed for gain or reward in any business, trade, profession, vocation, calling, occupation or employment. The concept of gain or reward envisages receipt of remuneration such as a salary or wages, business income, bonuses, commissions, fees or gratuities, in return for personal exertion. It does not include the passive receipt of income such as rent, trust distributions or dividends. Therefore, if a member only receives passive income, they would not meet the gainful employment test. Unpaid work also does not meet the definition of gainful employment.

The term ‘part-time’ means to be gainfully employed for at least 40 hours in a period of not more than 30 consecutive days in a financial year. So if you work 10 hours per week in one month or 10 hours over four days, that would be sufficient.

The ‘paid work’ condition only has to be met once in each financial year you make the contribution, after turning 65. Once you have met it, you do not need to be gainfully employed for the rest of the financial year or need to meet the work test again each time you make a contribution into your SMSF.

Timing difference between public fund and SMSF

Based on the ATO’s interpretation in my client’s case on the work test, it seems to depend on whether you are making contributions into an SMSF or a public superannuation fund and whether you are self employed.

If you are making contributions into an APRA regulated superannuation fund, then you must meet the work test prior to making your first contribution after turning 65. This is because the trustee of the fund will need to be satisfied that you have met the work test in order to allow you to contribute into the fund.

If you plan on making contributions into your SMSF, then it seems that as long as you have met the work test once in the financial year after you turned 65, you can contribute. This is especially important for members who are self employed. If you know that you will be in part-time paid employment at some time during the year, after turning 65, you can make contributions into your SMSF even though you may not have worked part-time at the time you make the contribution. Of course, if you assumed that you will work that year (after turning 65) and then fell ill and therefore were unable to work at all, then the contribution would need to be returned to the member within 30 days of the SMSF trustee becoming aware of the member’s illness.

The ATO’s decision in my client’s case seems to have wider applications. It seems to me that if you have an SMSF, as long as you meet the work test in the financial year that you make a contribution, it is not a contravention; regardless of whether the contribution was made before or after you satisfied the test.

 

Monica Rule is an SMSF specialist and author. Her website is www.monicarule.com.au. This article is for educational purposes and does not consider the needs of any individual.

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