Tax deductions

Beware of tax deductions on personal super contributions after age 67

Since this often means capital gains, a tax deduction for some resulting super contributions can be a great way to manage tax. It can also be a time when those who hold substantial assets in a family trust begin to withdraw more money (trust distributions) – making tax deductions for super contributions practical again.

It is perhaps precisely for this reason that the government does not want to be too generous. So while there’s no specific logic to leaving the work test in place for this tax deduction, it’s at least a way to control how many people can have it after turning 67.

But what new challenges will arise now that many more people will be contributing after age 67?

Greater flexibility

For those who pass the working test, probably none. That said, there will be some subtle changes. For example, the rule of thumb in the past was to “make sure you pass the working test before making the contribution”. This is because the work test used to determine if the fund was authorized to accept the contribution. This won’t be a problem after July 1 – the fund will be able to accept the contribution no matter what (for anyone under 75).

The work test is only relevant for claiming a tax deduction for it. That means there’s a bit more flexibility here.

Think of Jane who turns 70 in August and wants to claim a personal tax deduction for super contributions in 2022-23. Jane just needs to make sure she passes the work test at some point during this year. But the precise moment does not matter. For example, she could pay her dues in October and not take the work test until June 2023. Or the other way around. Or she could make regular contributions throughout the year and meet the job in May 2023. All of that will be fine.

But what if Jane makes her contributions thinking she’ll be fine when it comes to the work test, only to find out she’s not? Maybe her health is deteriorating and she can’t do the job she planned. Or the work she had planned gets carried over to the next fiscal year. Or maybe she just misunderstood the rules and thought what she was doing was enough to pass the work test, but it wasn’t.

Now what? Previously, if she made a contribution but did not meet the work test, the trustee was obligated to return the money to her (effectively canceling the contribution as if it had never happened). It was actually great for Jane – she didn’t get the contribution (or tax deduction) she wanted, but at least she wasn’t penalized.

In the future, it will not be so simple. Jane’s contribution in 2022-23 will be treated as a normal personal contribution (referred to as a non-concessional contribution). If it has already exhausted its 2022-23 cap on these contributions, it will have created a “deductible”. His super fund won’t be able to repay the money – he’ll have to wait for the ATO to give Jane a special decision.

Even then, the fund will have to return the money to the ATO, not Jane. The ATO will take additional tax (there is a notional amount of income added to the excess and that income is taxed), plus all of Jane’s other tax debts, and give her what’s left. All of this could take time and cost a lot more than Jane expected.

Keep in mind that if Jane has more than $1.7 million in super as of June 30, 2022, her cap on nonconcessional contributions is actually zero. Thus, the entire contribution could be a “surplus”.

And there is another more subtle change – the ATO (rather than the fund auditor) will control the working test. The test itself has not changed – anyone wishing to take it must complete at least 40 hours of paid work (volunteer work does not count) in a 30-day period. But woe to anyone trying to fabricate a paid work arrangement to meet the work test – the ATO will be all over them.

The new post-67 contribution opportunities, starting July 1, are pretty exciting for most people. But anyone wishing to claim a tax deduction for their contributions should exercise caution and ensure that the work test is met. It’s worth making sure you complete the test before making the contribution, even though it’s no longer strictly required.