Relaxing the rules

The way in which the work test operates has changed since the beginning of the 2023 income year. Mary Simmons scrutinises the amendments and the implications for superannuation contributions.

Since 1 July 2022, anyone aged between 67 and 75 is no longer required to satisfy a work test to be able to make non-concessional superannuation contributions. However, a work test requirement still remains where an individual wants to claim a tax deduction for any personal super contributions. That means members in this age bracket looking to make this type of contribution must satisfy the work test or work test exemption.

It is important to note this work test only ever applies to contributions made by individuals on or after they turn 67. So, if you have a member turning 67 in a financial year, the work test or work test exemption only needs to be met if the personal deductible contribution they are intending to make is executed on or after the day they turn 67.

Has the work test changed?

The requirement to be gainfully employed to meet the work test continues to be applied on a financial-year basis. Further, the work test still requires a person to have been gainfully employed at least 40 hours over a 30-consecutive-day period during the financial year in which the contribution is made.

The key change since 1 July 2022 is the work test can now be satisfied at any time during a financial year. Prior to this change, it was generally accepted the work test had to be satisfied before the fund was permitted to accept certain contributions on behalf of a member.

Has the work test exemption changed?

The work test exemption was originally introduced into the Superannuation Industry (Supervision) (SIS) Regulations with effect from 1 July 2019. This exemption was introduced to allow eligible members aged 67 to 74, who did not meet the work test in the

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From 1 July 2022, the work test exemption has simply been transferred to the Income Tax Assessment Act (ITAA) 1997 and remains available to those who met the work test in the immediately preceding year and who have a total super balance of less than $300,000 at 30 June of the previous financial year.

Has the definition of gainfully employed changed?

Under the SIS Regulations, the definition of gainfully employed was quite broad and included any person that is “employed or self-employed for gain or reward in any business, trade, profession, vocation, calling, occupation or employment”. This definition has been replicated, word for word, in the ITAA

This means for many the status quo does not change. However, for others, despite no change to their employment arrangement, there could be a significantly different outcome as they may no longer be entitled to a tax deduction.

To better understand the concept of being gainfully employed, we need to explore two key concepts:

1. Employed or self-employed

These terms are not defined and therefore take their ordinary meaning. Establishing employment is straightforward where an individual has a clear relationship with an employer and there is a written employment contract. Although a written contract is much easier to establish, the courts have determined contracts can also be expressed, implied or oral.

Over the years, paying wages as well as satisfying pay-as-you-go obligations, the degree of control and evidence of regular working patterns are additional factors that the courts have considered to determine employment. None of these factors is, by itself, decisive and arrangements need to be considered on a case-by-case basis.

For a self-employed person, it can be more complex. In many instances they will be running a business so reference to ATO Tax Ruling TR 97/11 is important as it outlines the indicators of carrying on a business the ATO considers relevant. These indicators must be considered in combination and no one indicator will be decisive.

When dealing with family members, the onus of proof of an employment arrangement is even higher given the proximity of the relationship between the parties as the courts tend to focus on the nature of the relationship.

2. Gain or reward

Gain or reward is very broad and takes its ordinary meaning as something given or received in return or recompense for service, merit, achievement, or such. Further, it is not limited to monetary remuneration. It can include any valuable consideration, including fringe benefits, bonuses, gratuities, business income or director’s fees.

However, the law does specifically require a nexus between the gain or reward and the activities being performed. This direct link can often restrict the broader definition of gain or reward and, in some instances, may make it difficult for someone to satisfy the definition of gainfully employed.

For example, it would not include a person receiving a government allowance for caring for a relative or the receipt of passive income, such as distributions from trusts, dividends or rental income.

Has anything changed for directors?

When dealing with company directors it is important to recognise it is a well-established principle that they are not considered common law employees. The only exception is where the director is also engaged under an employment contract to provide nondirector duties.

This is reinforced by the fact that both the SIS Act and the Superannuation Guarantee (Administration) Act 1992 (SGAA) provide for an extended meaning of employee to specifically include directors who are entitled to remuneration. This would ordinarily require the company’s constitution to also allow for the payment to directors or the passing of a shareholder resolution to that effect. It’s also important the payment for their services is made.

For superannuation purposes, even though directors or officeholders are not employees at common law, section 15A of the SIS Act expands the definition of employee to include them. An equivalent provision in section 12(2) of the SGAA extends the definition of an employee for super guarantee purposes.

This meant that before 1 July 2022, a director who was entitled to and paid fees for their services could be considered gainfully employed. It did not matter whether the company was running a business provided there was gain or reward for their efforts in executing their director duties and they completed the required number of hours.

However, as noted earlier, from 1 July 2022 the work test was shifted from the SIS Regulations to the ITAA and any link to an extended definition of employee in the SIS

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Act or SGAA has been broken. This has potentially narrowed the scope to apply the work test, with duties as a director no longer counting towards the hours required to meet the definition of gainfully employed.

As a result, individuals who may have previously been able to claim a deduction for a personal superannuation contribution due to the extended definition of employee may now be prevented from doing so, even though their employment arrangement and director duties have not changed.

In determining whether this is an unintended consequence, we refer to the explanatory material enacting this change where there is no indication of any intent to change or narrow the scope of the application of the work test. In fact, the explanatory material confirms the changes are merely relocating the existing work test from the SIS Regulations to simply remove the work test as a general condition for funds to accept personal contributions. The materials go on to state the changes are designed to effectively maintain the existing arrangements for personal deductible contributions (emphasis added).

This issue was originally raised at the SMSF Association’s National Conference and the ATO has since confirmed under the wording of section 290-165(1A) of the ITAA, a director who was entitled to, and received, directors fees would technically not be an employee under the tax act. This means without a law fix, any work undertaken in that capacity would not count towards the 40 hours required to satisfy the work test to be eligible to claim a tax deduction for personal superannuation contributions.

Interestingly, the ITAA does apply the extended definition of employee under the SGAA in relation to the deductibility of employer contributions. This means you can end up with the situation where a company can claim a tax deduction for any employer contributions they make for a director, yet that same director would be unable to claim a tax deduction for any personal contributions based on any work they undertook in their officeholder capacity. Essentially, anyone who is not a common law employee may now be at risk of no longer being able to count their hours worked towards meeting the 40 hours work test. This could include parliamentarians, local government councillors and police officers.

What about directors of investment companies or trusts?

The extended definition of an employee has always required some gain or reward in exchange for the execution of director duties. These arrangements contrast with members who are directors of a corporate trustee of a passive investment trust where it is unlikely they would satisfy the employment test unless the director was actively involved in producing the assessable income of the trust or the trust was conducting an active business.

Even if the trust is operating a business, receipt of trust distributions alone would not ordinarily satisfy the gainful employment test because it is a beneficiary entitlement rather than a direct result of particular duties being performed.

For members operating their business through a family trust or private company, it is expected the ATO will continue to look closely at these arrangements to ascertain whether an employment arrangement exists.

Administering the new rules

At a minimum, we would expect the ATO to maintain its efforts in ensuring the requirements around a valid notice of intent to claim a tax deduction for personal superannuation contributions continue to be met as these requirements have not changed.

With respect to the work test changes for those between 67 and 75, it would be reasonable to expect the ATO to look at individual tax returns to data match and look for anomalies.

Where to next?

Whether a person is gainfully employed remains under the spotlight for anyone intending to continue contributing to super between age 67 and 75 and who wishes to claim a tax deduction for these contributions. It is particularly important to review any arrangements that previously relied on the extended definition of an employee under the SIS Act before these members make any personal deductible contributions.

Because the requirement to meet either the work test, or work test exemption, is no longer a pre-cursor to making a super contribution, there is the potential for things to get messy. Consider an individual who makes a personal super contribution during the year, only to find out at the end of the year they are ineligible to claim the contributed amount as a tax deduction because they have failed to meet the work test as they have relied on the extended definition of an employee under the SIS Act. Where this occurs, the contribution will instead be treated as a personal contribution and counted toward the member’s nonconcessional contribution cap and could give rise to an excess contribution tax assessment.