Unintended consequences of work test changes to be rectified

“On 1 July 2022 the work test and work test exemption rules which used to apply to restrict a super fund’s ability to accept contributions for members aged between 67 and 74 (including up to 28 days after the end of the month in which they turned 75) were abolished – effectively allowing members to make personal contributions up to age 75.”

“However, the work test and work test exemption did not disappear completely. Instead, they were relocated into the tax act to create a new aged-based deduction rule which would require individuals in this age group to satisfy the work test or the work test exemption in the year the contribution was made to be eligible to claim a deduction for their personal contribution.”

Mr Day said when these rules were transplanted from the SIS regulations into the Tax Act, the wording of the new aged-based deduction rule effectively meant only common law employees would be treated as gainfully employed and able to satisfy the work test or work test exemption.

“As a result, employees covered under a separate superannuation definition of employee would no longer be eligible to claim deductions for their contributions from 1 July 2022, as they would not be treated as being gainfully employed,” he said.

“This included, company directors, constitutional or statutory office holders, parliamentarians and members of the Australian Defence Force.”

To rectify this situation, the ATO registered LI 2023/D11 (effective 1 July 2022) to modify the relevant section to ensure people aged 67 to 75 who are an employee under the extended superannuation definition will also be treated as being gainfully employed and therefore able to satisfy the work test and work test exemption where they meet relevant criteria.

“While the legislative instrument is only draft at this stage, it is good news as it means that should it become law all people who were previously eligible to claim deductions for their personal contributions prior to 1 July 2022 will continue to be able to do so from that date onwards,” Mr Day said.

 Mary Simmons, head of technical for the SMSF Association said many company directors found themselves in the firing line with the changes in 2022.

“That’s because company directors have not traditionally been considered to be ‘common law’ employees. The exception being where the director is engaged under an employment contract to provide non-director duties.”

“Fortunately, the ATO has been quick in attempting to resolve this unintended consequence. The Commissioner is using his Remedial Powers to modify the law to ensure that an individual can meet the work test if they satisfy the extended definition of an employee under the SIS Act.

“This draft instrument is open for consultation until 5 May 2023 and is expected to be welcomed by all in the superannuation industry as it applies to anyone who needs to rely on the extended definition of employee under the SIS Act to claim a tax deduction for their personal contributions. This could include parliamentarians, local government councillors and police officers.”