How to pass the ‘work test’

SMSF technical expert and columnist for The Australian newspaper
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Injecting money into your super becomes trickier once you’re 65. This is because 65 is the age that the government generally assumes you’re going to retire and start taking money out.

So today, I’m going to explain how you can continue to contribute to your super if you’re still working and have not yet turned 75, because in the year you turn 75, the rules change yet again.

If you’re in the 65-75 age bracket, you’ll normally be required to pass an employment test before you can make a personal super contribution. If you fail to do this, you’ll be penalised with a heavy tax on your contribution.

The three rules for contributions

The first rule to note is that contributions made by an employer to satisfy an industrial award can be made at any time. There’s no gainful employment test for these.

A similar rule applies for Super Guarantee contributions made by your employer. But, as it stands, your employer doesn’t have to pay you super if you’re over 70. This may change because the government has proposed that this maximum age could increase to 75 from July 2013.

The third rule involves all other contributions, and this is where the work test comes in. Other contributions – such as personal contributions – can only be made if you’re gainfully employed for at least 40 hours over a period of less than 31 consecutive days during that financial year. Basically, if you’ve worked a minimum of 40 hours in a month at some point during the year, you’ll pass this test.

What is meant by gainful employment?

Officially it means, “employed or self-employed for gain or reward in any business, trade, profession, vocation, calling, occupation or employment”.

In essence, it means you’ve worked in return for something tangible – usually pay from an employer. So this rules out volunteer work.

What happens if you don’t work for an employer?

Once the arrangement takes on a more personal nature, such as managing investment properties or minding grandchildren, it can become difficult to prove that you’ve actually been working. Keeping diary notes of work done and activities performed over an extended period may be essential. Simple bona fide compliance with this requirement is often the best course of action.

What if you run a business such as your own share trading business or even a gambling business?

Throughout the years there have been some very complex High Court cases about what’s considered to be a ‘business’. For example, taxpayers have argued that their gambling was part of a gambling business in order to make their losses tax deductible. The Australian Tax Office has fought these cases because they don’t want gamblers to receive this type of tax benefit.

The factors the ATO take into account in determining if you’re running any type of business are as follows:

  1. The nature of the activities, especially if the purpose is to make a profit;
  2. The repetition, volume and regularity of the activities and how similar they are to other comparable businesses;
  3. The keeping of books of accounts and records of trading stock, business premises, licences or qualifications, a registered business name and an ABN;
  4. The volume of trading and operations;
  5. The amount of capital used in running the business.

You can apply for a Private Ruling from the ATO where they’ll determine whether or not you’re running a business. If they say yes, and you work the minimum number of hours, then you’ll satisfy the work test.

Once you turn 75, no further contributions can be made. However, there is a special rule that applies around your 75th birthday. This is that a super fund can accept a contribution if it’s made on or before the day that falls 28 days after the end of the month in which you turned 75.

For example, suppose you’re going to turn 75 on 21 October this year. This means that you can make an eligible contribution up until 29 November.

In my next column, I’ll review the essential rules you need to know if you want to claim a tax deduction for your personal super contributions.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Also in today’s Switzer Super Report

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