Retirement

Super changes broaden the options for windfall contributions

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The superannuation system is based on the notion that you can build up your nest egg steadily over the course of your working life, but that is not always the case.

Breaks from the workforce, a lack of disposable funds to top-up compulsory contributions, or just a lack of retirement planning can all lead to retirees finding themselves with a super balance unable to sustain up to four decades of life after work.

This year's Federal Budget offers two key changes to superannuation that reflect an understanding of this challenge, with the partial removal of the work test for those aged 67 to 74 and a lowering of the age threshold for those seeking to make a downsizer contribution with the proceeds from the sale of the family home.

Together, they make it easier for people to direct larger sums into superannuation immediately before and after retirement, including windfalls from inheritance, property, or the sale of a business.

Removing the work test

The more important of the two changes is the removal of the work test for those aged 67-74 making non-concessional contributions and allowing this group access to the three-year bring forward rule.

Under the present rules, people in this age group are unable to make member contributions to superannuation unless they meet the work test, which requires them to show they are gainfully employed for at least 40 hours during a consecutive 30-day period in the financial year in which the contributions are made.

This restriction has tended to make it harder for people to direct any windfalls they might receive later in life, into their superannuation. Such windfalls could come from realising equity in the family home or the sale of a business in combination with other small business capital gains tax concessions. It could equally be an inheritance, with The Grattan Institute's Ensuring a fair go for younger Australians report of 2019 showing that about a third of inheritances flow to people aged 60 or older, and 63% to those older than 55.

By removing the work test, it becomes possible for the proceeds of a windfall or asset sale to be used to top up superannuation balances, while recognising these contributions are still subject to the transfer balance cap of $1.6 million, increasing to $1.7 million on 1 July 2021.

The removal of the work test for this cohort is a good start, although it will likely add to the overall complexity of the system by creating another exception within the system for one age group.

It would have been our preference to see the work test removed in its entirety to reduce the complexity in the system. An aged-based exemption is unnecessary, given the contribution cap effectively limits the balance.