The 2019-20 Federal Budget confirmed the changes to contribution rules announced in the Treasurer’s Press Release on 1 April.
Currently, once a person turns 65 they must meet a work test before any further voluntary contributions can be accepted by a super fund (unless the contribution is a downsizer contribution or a work test exempt contribution, both of which are covered later in this article). This test requires them to have completed 40 hours of gainful employment in a 30-day period. Voluntary employment does not meet the definition of “’gainful” employment, so volunteers or those who only work one day a week generally can’t contribute once they turn 65.
The Government has proposed to increase the key age here from 65 to 67 from 1 July 2020.
The measure also extends the ability for those aged 65 and 66 to access the bring forward arrangements for non-concessional contributions (NCCs).
Currently, certain individuals can make up to 3 years’ worth of NCCs in a single year (based on the current NCC cap of $100,000, this is $300,000 in a single year). There are rules that limit this opportunity for anyone with a Total Superannuation Balance of $1.4m or more at the previous 30 June but assuming these are met, age is the only other key factor. The final year in which an individual can generally trigger these bring forward rules is the year in which they turn 65.
Should the proposed change be introduced, this would be extended to the year in which the individual turns 67.
Interestingly, and happily, no mention was made of changing the Conditions of Release to increase the current unrestricted access to super from age 65 to 67. This means people in that age group can both contribute and draw down on their super without meeting any other tests.
There was also no mention of amending the downsizer contribution rules which are currently only available for those age 65 or over. Presumably, this means that a non-working 65 to 67 year old will be able to make voluntary contributions and a downsizer contribution (up to the relevant caps) all at the same time.
Nor was there any mention of winding back the work test exempt contributions that are currently legislated to commence from 1 July 2019. These are the rules that allow individuals to contribute one extra year after they last met the work test providing they had a low balance (less than $300,000) at the previous 30 June (see our blog for details of the new work test exempt contribution rules).
John is 64 and will turn 65 in August 2019 which is when he plans to retire. So far, he has built up very little superannuation and is well within the balance limits for someone wanting to make large non-concessional contributions.
He was planning to contribute $100,000 NCC in June 2019, and another $300,000 in July 2019 before turning 65 – a total of $400,000. Under the current rules, he will be ineligible to make further NCCs as in the 2022/23 year he would be well over age 65 and not working and presumably not eligible to make work test exempt contributions (as his balance is likely to be greater than $300,000 at 30 June 2022).
With this announcement, however, he wonders if he should re-think this strategy. If he triggers and fully utilises his bring forward in the current financial year by contributing $300,000 in June 2019, under this proposed measure he would be eligible to contribute $300,000 NCC again in July 2021 before he turns 67 – a total of $600,000 in a three-year period.
He would also be able to use the downsizer rules to add a further $300,000 from the age of 65, if he chooses to sell his home and meets all the requirements.
This proposal is a positive one, but the above example shows how hard it is to plan in this uncertain political climate. If the measure doesn’t go through – and there’s a good chance it won’t - he will have missed out on the additional $100,000 he was planning on contributing in June 2019 and only get $300,000 in prior to age 65 and retirement.
A further part of the proposal by the Treasurer is to increase the age for making spouse contributions from 69 to 74 from 1 July 2020, with those aged 65 and 66 no longer needing to meet a work test. This could be a great opportunity to get further monies into super in anticipation of retirement or to equalise balances between a couple.
There is a tax offset available of up to $540 for the contributing taxpayer in respect of eligible contributions made on behalf of their spouse if the spouse’s earnings are less than $37,000 a year so an opportunity lies there too.
Take these measures as a positive, however, as always take care with acting on proposals without them becoming law. In this case it may be prudent to wait to see if they go through before making major changes to financial plans.
Maximum age for making contributions
While the proposed measure has extended the period for which contributions can be made without a work test, as well as the rules for spouse contributions, there has been no change to the maximum age for contributions.
Generally, all contributions stop when a member reaches age 75 – or more correctly, the 28th day of the month following their 75th birthday. This will remain and only contributions that are mandated (eg award contributions) can be made after that time.