Impact of removing the work test

The decision by the Federal Government to remove the work test for those in retirement but still under 75 years of age, was just one of those great common-sense decision that you look at and think why did it take so long.

Just to prompt everyone’s memory the Federal Government legislated effective from July 1, 2022, to remove the work test which previously required anyone over age 65 to confirm that they had worked 40 hours in a one-month period.

This made it much easier for those aged between 65 and 75 to squeeze more money into super on an after-tax basis or non-concessional basis and it looks as though most older Australians are taking full advantage of it.

The recently released Class 2024 Annual Benchmark Report suggested that half of all non-concessional or after-tax contributions during the 2022/23 financial year came from those age 65 or older.

The largest increase occurred in non-concessional contributions made by those over 70 years of age, increasing from just 8 per cent of all non-concessional contributions in the previous year to 26 per cent.

The reason of course for the strong take up it obvious. For those in retirement, the opportunity to squeeze more money into super is irresistible. Once there, it can be used to support an account-based pension and effectively become tax free both in terms of capital gains and income.

Funds that are left outside super, regardless of where those funds are, will be taxed at the marginal tax rate of the person who is holding those assets and so will require the holder to lodge a tax return each year.

In fact, my goal for all my clients in retirement is to have a situation where they own their own house outright and have all their remaining assets held in super supporting an account-based pension.

If I can achieve this for a client, it effectively means that they will never have to pay income tax again or visit an accountant to have a tax return completed on their behalf. How sweet is that?

Of course, the challenge is getting money into super as there are strict rules surrounding when and how Australians can contribute, and the Federal Government imposes severe penalties for getting it wrong.

And while the Government has made it easier to contribute funds into super, it can still take several years to conform to the contribution rules and get large amounts into super.

This is particularly important for those people moving into retirement and depending on contributing the funds from the sale of an investment property or a substantial inheritance into super.

Once again this is where good financial planning advice can save you not just in the first year but year after year in your retirement as you structure your finances, so you never need lodge another personal tax return.