Be careful about tax deductions on extraordinary personal contributions after turning 67

Since this often means capital gains arise, a tax deduction for any resulting extraordinary contributions can be a great way to manage taxes. It may also be a time when those with substantial assets in a family trust start taking more money out (distributions from trusts), again making tax deductions useful for extraordinary contributions.

Perhaps that is precisely why the government does not want to be too generous. So while there’s no specific logic to dropping proof of work for this tax deduction, it’s at least a way to control how many people can have it after they turn 67.

But what new challenges will arise now that many more people will be contributing after 67?

greater flexibility

For those that meet proof of work, probably none. That said, there will be some subtle changes. For example, the general rule of thumb in the past has been “make sure you meet the proof of work before making the contribution.” That’s because the proof of work used to determine whether the fund could accept the contribution. That won’t be a problem after July 1: the fund will be able to accept the contribution no matter what (for anyone under 75).

The proof of work is only relevant to claim a tax deduction for it. That means there’s a bit more flexibility here.

Consider Jane, who turns 70 in August and wants to claim a personal tax deduction for extraordinary contributions in 2022-23. Jane just needs to make sure she meets the job test at some point during that year. But the exact moment doesn’t matter. For example, she could make her contribution in October and not complete the work test until June 2023. Or the other way around. Or she could make regular contributions throughout the year and get the job done in May 2023. All of that will be fine.

But what if Jane makes her contributions thinking she’ll be fine when it comes to the proof of work, only to find out she isn’t? Maybe her health will deteriorate and she won’t be able to do the job she planned. Or the job she had booked is delayed until the next fiscal year. Or maybe she just misunderstood the rules and thought what she was doing was enough to pass the job test, but it wasn’t.

Now what? In the old days, if she made a contribution but didn’t meet the test of work, the trustee was forced to pay her back (effectively reversing her contribution as if it never happened). That was great for Jane: she didn’t get the contribution (or tax deduction) she wanted, but at least she wasn’t penalized.

In the future, it will not be so simple. Jane’s contribution in 2022-23 will be treated as a normal personal contribution (known as a non-concessional contribution). If she has already used up her 2022-23 limit on these contributions, she will have created a “glut.” Her super fund will not be able to repay the money; she will have to wait until the ATO gives Jane a special determination.

Even then, the fund will have to repay the money to the ATO, not to Jane. The ATO will take out some additional taxes (there is a notional earnings amount added to the excess and these earnings are taxable), as well as any other tax debt Jane owes, and give her what’s left. It could all take time and be much more expensive than Jane expects.

Note that if Jane has more than $1.7 million in her pension as of June 30, 2022, her nonconcessional contribution limit is actually zero. So the entire contribution could be an “excess.”

And there is another more subtle change: the ATO (instead of the fund’s auditor) will control the proof of work. The test itself hasn’t changed: Anyone who wants to meet it must do at least 40 hours of paid work (volunteer work doesn’t count) in a 30-day period. But woe betide anyone who tries to fabricate a paid work arrangement to meet the work test! The ATO will be on top of them.

The new giving opportunities after 67, beginning July 1, are pretty exciting for most people. But anyone who wants to claim a tax deduction for her contributions should tread carefully to make sure the work test is met. It is worth making sure you meet the test before making the contribution, although it is no longer strictly necessary.

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