Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 124

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.

RELATED ARTICLES

Tax paid by your SMSF can be returned to your dependants

What is the new work test exemption?

Five things SMSF trustees should consider right now

banner

Most viewed in recent weeks

The creator of the 4% rule and his own retirement

The 4% withdrawal rate in retirement is an industry standard, a level where a retiree could be confident of not running out of money. Its creator Bill Bengen explains its use in this interview with Michael Kitces.

Welcome to Firstlinks Edition 383

One of the downsides of Donald Trump commanding the headlines is that we skim over other significant issues. For example, few Australians read the China Daily News or coverage of its contents, missing official statements that are terrifying hundreds of Australian producers. China says Australia will 'pay tremendously' for its recent lack of respect.

  • 12 November 2020

Seven items your estate plan may have left out

Most people pay cursory attention to estate planning, limited to a will and maybe a chat with the children. Those who want to make their intentions clearer and easier for others should check these quick tips.

Graeme Shaw on why investing is at a pivotal moment

Company profits have not improved for many years but higher valuations have been driven by falling rates and excess liquidity. Conditions do not suit a value and contrarian manager but here are some opportunities.

Alex Vynokur: ETFs deliver what’s written on the can

Exchange Traded Funds have moved well beyond indexes to a range of sectors, themes, smart beta and active. They are attracting strong flows from both experienced investors and newcomers.

11 key findings on retirement dreams during the pandemic

A mid-pandemic survey of over 1,000 people near or in retirement found three in four are not confident how long their money will last. Only 18% felt their money was safe during a strong economic downturn.

Latest Updates

Retirement

Five ways the Retirement Review points to new policies

The Retirement Income Review goes much further than an innocent-sounding 'fact base', and is sure to guide policies in the run up to the next election. It will change how we think about retirement incomes.

Property

Steve Bennett on investing in direct property for the long term

As people stayed home during the pandemic, a bearish view swept over most property sectors, but many have thrived and prices have recovered rapidly. The best opportunities are in long leases with quality tenants.

Retirement

Retirement Review gives strong views on hoarding of super

The Review includes some profound findings, most notable that retirement income should include drawing down far more capital. Expect post-retirement products to proliferate under a Retirement Income Covenant.

Superannuation

Paul Keating on why super relies on “not draining the bath”

Paul Keating is the champion of compulsory superannuation as the central means of funding retirement. In the wake of the Retirement Income Review, he is at his passionate best defending the system, with Leigh Sales.

Latest from Morningstar

Is your portfolio too heavy on technology stocks?

Investors with heavy allocations to a broad US index should check how much is exposed to tech stocks, especially when valuations look a bit steep. It might be time to reallocate to other sectors or styles.

Investment strategies

Beware of burning down the barn to bury the debt

At some point, policymakers will turn to the task of deleveraging, to work off massive debt burdens built up during the pandemic. Australia is already ticking the boxes on many policies used in the past.

Superannuation

New bankruptcy rules may have a domino impact on SMSF pensions

During COVID, bankruptcy rules have allowed small businesses to trade while insolvent. It may mean an SMSF is hit by the collapse of a business leaving trustees struggling to meet their own legal obligations.

Sponsors

Alliances

© 2020 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use.
Any general advice or class service prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, has been prepared by without reference to your objectives, financial situation or needs. Refer to our Financial Services Guide (FSG) for more information. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.