House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Josh Frydenberg MP)

Chapter 4 Repealing the work test for superannuation contributions

Outline of chapter

4.1 Schedule 4 to the Bill amends the ITAA 1997 to apply the work test to individuals aged between 67 and 75 years who claim a deduction for personal superannuation contributions. This change facilitates the repeal of the existing work test that applies to non-concessional and salary sacrifice contributions.

4.2 Schedule 4 to the Bill also amends the ITAA 1997 to allow such individuals to make or receive non-concessional superannuation contributions under the bring forward rule.

4.3 All legislative references in this chapter are to the ITAA 1997 unless otherwise indicated.

Context of amendments

4.4 In the 2021-22 Budget, the Government announced that all individuals aged younger than 75 years will be allowed to make or receive non-concessional (including under the bring-forward rule) or salary sacrifice superannuation contributions without meeting the work test, subject to existing contribution caps.

4.5 In practice this means that individuals aged between 67 and 75 years will still have to meet the work test to make personal deductible contributions.

4.6 In conjunction with amendments contained in this Schedule, the SIS Regulations and the RSA Regulations will be amended to implement the removal of the work test for non-concessional and salary sacrificed contributions.

4.7 These changes build on the Government's previous reforms to the age rules on superannuation contributions, including the reforms in the Treasury Laws Amendment (More Flexible Superannuation) Act 2021, further improving the flexibility for older Australians to make contributions to their superannuation.

Comparison of key features of new law and current law

Detailed explanation of new law

Applying the work test to personal deductible contributions

4.8 Subdivision 290-C sets out the conditions for an individual claiming a deduction for personal superannuation contributions (that is, contributions made by the individual into superannuation). These include 'age related conditions' such as the requirement that contributions are received on or before the day that is 28 days after the end of the month in which the member turns 75.

4.9 Historically, the work test has applied as a condition on a superannuation fund accepting contributions rather than as a condition on an individual claiming a deduction for the contribution. This reflects that the work test applied irrespective of whether the individual claimed a deduction or not. However, given its reduced scope in respect of personal deductible contributions, the work test can now be applied to those contributions in a targeted manner.

4.10 As a result of these amendments, certain individuals can only claim a deduction for personal superannuation contributions if they meet the work test in the income year in which the contribution is made. [Schedule 4, item 2, section 290-165(1A)]

4.11 The individuals covered by this new work test are those who are aged between 67 years and 75 years. Individuals who are aged 75 and meet the work test can only claim a deduction in relation to a contribution that is made on or before the day that is 28 days after the end of the month in which they turn 75. [Schedule 4, item 2, section 290-165(1A)]

4.12 This additional period is consistent with the existing work test and age-related condition for claiming a deduction. It allows individuals a final period in which to make contributions after they turn 75.

4.13 These changes effectively relocate the existing work test from the SIS Regulations and the RSA Regulations. It is intended that amendments to those regulations be made to remove the work test as a general condition for funds to accept personal contributions.

4.14 The combined effect of these changes implements the measure announced in the 2021-22 Budget. As a result, individuals will no longer be required to meet the work test in respect of contributions that are non-concessional contributions or salary sacrificed contributions. The work test will continue to apply to personal deductible superannuation contributions through the changes introduced by these amendments.

4.15 This approach effectively maintains the existing arrangements for personal deductible contributions. Applying the work test in respect of deductions also addresses potential timing and information issues with funds being required to determine the character of a particular personal contribution at the time it is made.

4.16 A requirement to determine the character of a particular personal contribution at the time it is made would be problematic for funds because individuals are not required to provide a notice of intention to deduct a contribution to a fund at the time a contribution is made. Such notices can be provided at a later time, reflecting that individuals can wait until the end of an income year before deciding the amount of personal contributions for which they wish claim a deduction (for example, to ensure they do not breach their concessional contribution cap because of employer contributions made over the year). The same issue does not arise under the existing work test for accepting personal contributions because funds are required to apply that test to all personal contributions, irrespective of whether a deduction is ultimately claimed by the individual.

4.17 Equivalent changes are not required to the age-related conditions for an employer claiming a deduction for a contribution they make in respect of an employee. This reflects the intention that all individuals under 75 are able to have salary sacrificed contributions made in respect of them by their employers.

4.18 While the existing work tests in the SIS Regulations and the RSA Regulations apply on a financial year basis, the new test applies on an income year basis. This reflects the different accounting periods that are used under those regulations relative to the contribution rules in the ITAA 1997. However, there is no material difference as the periods are aligned for the overwhelming majority of individuals who make personal deductible superannuation contributions (being Australian residents with standard income years).

4.19 Consistent with the existing work test in the SIS Regulations, an individual must be 'gainfully employed' for at least 40 hours in any consecutive 30-day period in the income year in which the contributions are made. [Schedule 4, item 2, section 290-165(1A)(a)]

4.20 Individuals are also able to access the limited exception to the work test that applies on a 'one-off' basis under the existing work tests in the SIS Regulations or the RSA Regulations.

4.21 As such, an individual who does not meet the work test in the year in which a contribution is made can still claim a deduction for the contribution if they:

•

met the work test in the previous income year;

•

have a total superannuation balance of less than $300,000 in that previous income year;

•

have not already relied on the 'one off' rule in respect of any contribution; and

•

have not made a contribution that was accepted under a prescribed provision of the SIS Regulations or RSA Regulations.

[Schedule 4, item 2, section 290-165(1A)(b)]

4.22 The reference to a contribution accepted under a prescribed provision allows the regulations to specify the equivalent 'one off' exceptions that apply to the existing work tests in the SIS Regulations and RSA Regulations. Specifying the provision through regulations ensures there are no issues with cross-referencing the equivalent provisions correctly in the event that they are amended, relocated or repealed (either through the related regulation changes for this measure or a subsequent process).

4.23 If an individual makes a contribution to a fund and is unable to meet the work test or access the 'one-off' exception, then the contribution will remain a non-concessional contribution on the basis that no deduction can be claimed for it.

4.24 A consequential amendment is made to the existing age-condition for individuals aged 75 years and over to ensure there is no overlap between that rule and the new work test. To improve readability, consequential amendments are also made to include headings for the existing age-related conditions for claiming deductions for personal contributions. [Schedule 4, items 1 to 3, sections 290-165(1) and (2)]

Bring forward non-concessional contributions cap

4.25 Subdivision 292 caps the amount of non-concessional contributions made in each financial year. However, individuals can 'bring forward' their non-concessional contributions from two future years if they meet certain eligibility criteria.

4.26 These criteria include the requirement that an individual is under 67 years of age in the financial year in which they make the contribution.

4.27 The amendments in this Schedule increase that the cut-off age for accessing the bring forward rule from 67 to 75 years. [Schedule 4, item 4, section 292-85(3)(c)]

4.28 This means that individuals aged 67 to 74 years (inclusive) who were not previously able to bring forward non-concessional contributions due to their age may do so, starting in the 2022-23 financial year. [Schedule 4, item 4]

4.29 Noting that individuals aged 75 and over are generally precluded from making voluntary contributions to superannuation, the amendments provided by this Schedule are not intended to enable individuals approaching 75 years of age to bring forward non-concessional contributions from future years (i.e. during which they will be aged 75 years or over) where they will not have eligible cap space. Individuals will only be able to access the bring forward arrangements for years in which they have cap space.

Application and transitional provisions

4.30 The amendments provided by this Schedule commence from the first day of the first quarter after the day the Bill receives Royal Assent.

4.31 The amendments apply to contributions made on or after 1 July 2022. [Schedule 4, item 5]