Making light work of the work test

Lyn Formica

Director, McPherson Super Consulting

Topics

• Work test for making contributions

• Employment activity & deductibility of contributions

• Retirement & access to super

Contributions – SIS Eligibility

Work Test - Contributions

• Gainfully employed

• At least 40 hours in no more than 30 consecutive days

Gainfully Employed• Employed or self employed

• In any business, trade, profession, vocation, calling, occupation or employment

• For gain or reward• Not defined in SIS• Would generally include

• Salary/wages• Directors fees• Business income• Bonuses/commissions• ‘In return for personal exertion’

Examples1. Volunteer work?

2. Overseas employment?

3. Managing an investment portfolio?

• In own name?

• Via entity?

4. Writing a book?

5. Receiving a Carer Payment from Centrelink?

6. On sabbatical?

7. In receipt of trust distribution?

8. In-kind payments?

Examples cont’d

When to Satisfy?

• In same financial year as contribution• Trap – gainfully employed & sell active asset in 2016 yr but don’t receive CGT

proceeds until 2017 yr

• Before contribution made?• ATO view?

• What if contribution is ‘reserved’?• In year contribution made?

• In year contribution allocated?

Substantiation?• Genuine ‘employment arrangement’

• PAYG Summaries?• Employment contract?

• Self employment• Carrying on a genuine business?

• Time sheet/diary to substantiate hours

• Written declaration by individual recommended

• Declare income in personal income tax return

• Declare income to Centrelink (if relevant)

What if Contribute & Not Eligible?• Contribution must be returned

• No SIS breach if returned within 30 days of trustee becoming aware

• If returned, not reported/accounted for as a contribution

Contribution Deductibility -Employers• Test One - Employee test

• All persons must satisfy• Common law employee or

• SG section 12 employee including directors if entitled to remuneration

• Test Two – Engagement test• Only for common law employees

• Engaged in producing assessable income of employer, or

• Resident & engaged in business of employer

Company Directors?• Not common law employees

• Ensure are SG section 12 employees• Must be entitled to payment under company constitution• Read constitution & pass any necessary resolutions

• Eligible for deduction even if all income of company is passive• Example – bucket company & only income is discretionary trust distributions

• If over age 65, how was gainful employment test satisfied?• 100% salary sacrifice OK?• How many hours worked?

Trust Structures?• Must be common law employee & ‘engaged’ in earning income/business

• Same position for corporate or individual trustees

• Risk if all income is passive as not likely to be common law employees

• If trust earns only passive income• Trust to distribute to corp beneficiary

• Ensure directors of corp beneficiary are entitled to remuneration

• Corp beneficiary makes contribution & claims deduction against trust distribution

• Trust to distribute to individual• Ensure individual can contribute & will pass 10% rule

Genuine Employment Arrangements• Brown and Commissioner of Taxation [2010] AATA 829

• France and Commissioner of Taxation [2010] AATA 858

• VN Railway Pty Ltd v FC of T [2013] FCA 265

Contribution Deductibility - Indivs• Entitled to deduction for personal contribution provided

• Not employee for SG purposes, or• Satisfy 10% rule

• Non-residents?• Generally employee for SG purposes• Income derived by non-resident from overseas employment not assessable income in Aust &

not counted in 10% test

• Income Protection Insurance?• Receipt of income protection insurance proceeds taken to be income from employment• But 10% rule only relevant if engaged in employment activities during year

Accessing Benefits –SIS Eligibility• Eligible if satisfy ‘condition of release’

• ‘Retirement’ is a condition of release

What is ‘Retirement’?• 1st Limb

• Reach Preservation Age

• Cease gainful employment

• No intention of returning to work for 10 or more hours per week

• 2nd Limb• Reach age 60

• Terminate any employment after 60th birthday

Preservation Age

Ceasing Gainful Employment• ‘An arrangement under which member was gainfully employed has come

to an end’

• No further explanation in SIS

• Case by case basis but• Physically cease activities for which they were employed

• Pay out accrued leave entitlements

• If director only, resign

• No further remuneration paid (including super)

Substantiation?

• Genuine termination

• For 1st limb, recommend statutory declaration re future intention

Example• David & Kelly, both age 58

• Grazing property held in partnership

• David actively works the property, Kelly’s role in partnership is minimal

• Want access to lump sum

• What is needed to satisfy retirement definition?• Sale of property?

• Other partnership assets?

• Stat dec by Kelly?

• John, age 58

• Director of manufacturing business

• Actively involved in the business but wanting to wind down

• Want access to lump sum

• What is needed to satisfy retirement definition?• Cease all activities for company?

• Remain director only?

Example

Summary

• Preservation age to age 59• Contributions – no need to satisfy gainful employment test

• Access to benefits – need to satisfy 1st limb retirement def’n if wanting lump sum

• Age 60 to 64• Contributions – no need to satisfy gainful employment test

• Access to benefits – have access to 2nd limb retirement def’n if wanting lump sum

• Age 65 to 74• Contributions – need to satisfy gainful employment test

• Access benefits – fully accessible

Thank youQ&A

Lyn Formica

GPO Box 221

Brisbane Qld 4001

Phone (07) 3833 3100

lyn@mcphersongroup.com.au

www.mcphersongroup.com.au

© McPherson Super Consulting Pty Ltd 2016

This presentation is for general information only. Every effort has been made to ensure that it is accurate, however it is not intended to be a complete description of the matters described. The presentation has been prepared without taking into account any personal objectives, financial situation or needs. It does not contain and is not to be taken as containing any securities advice or securities recommendation.

Furthermore, it is not intended that it be relied on by recipients for the purpose of making investment decisions and is not a replacement of the requirement for individual research or professional tax advice. This presentation was accompanied by an oral presentation, and is not a complete record of the discussion held. No part of this presentation should be used elsewhere without prior consent from the author.

Disclaimer

© SMSF Association 2016

This presentation is for general information only. The material and opinions in this presentation are those of the author and not those of the SMSF Association. Every effort has been made to ensure that it is accurate, however it is not intended to be a complete description of the matters described. The presentation has been prepared without taking into account any personal objectives, financial situation or needs. It does not contain and is not to be taken as containing any securities advice or securities recommendation.

Furthermore, it is not intended that it be relied on by recipients for the purpose of making investment decisions and is not a replacement of the requirement for individual research or professional tax advice. This presentation was accompanied by an oral presentation, and is not a complete record of the discussion held. No part of this presentation should be used elsewhere without prior consent from the author.

Disclaimer