Unexpected work test issue impacts personal contributions

CFS head of technical services Craig Day cautioned that clients impacted by this issue may need hold off making contributions they plan to claim a deduction for as there could be potential tax implications.

Mr Day explained that on 1 July 2022, a new aged based deducibility rule became effective which requires members aged 67 to 74 to satisfy a work test or work test exemption to be eligible to claim a tax deduction for their personal super contributions.

As part of those changes, the work test and work test exemption were effectively moved from the Superannuation Industry (Supervision) Regulations (SIS Regulations) into the Income Tax Assessment Act 1997 (ITAA 1997).

However, the wording of the new sub-section in section 290-165 ITAA 1997 failed to capture people covered under the extended definition of employee in the Superannuation Industry (Supervision) Act 1993 (SIS Act) and SG Admin Act, said Mr Day.

“As a result, the ATO has confirmed that clients in this age group that may have previously been eligible to claim a deduction for their personal contributions due to being captured by the extended definition, will now be prevented from doing so as their duties will no longer count towards being gainfully employed,” he cautioned.

The extended definition of employee in the SIS Act and SG Admin Act, he explained, covers certain types of employment arrangements that are not covered by the definition of a common law employee.

“This includes company directors, as the courts have defined a director to be an office holder of a company and not an employee of a company,” he said.

Under the previous work test rules, Mr Day said that any duties performed by clients aged 65 to 74 in roles captured under this extended definition in the SIS Act, would have been counted towards meeting the work test or work test exemption.

Mr Day said the failure to include this extended definition of employee under the new rules will impact a range of different clients including:

-          Members of the Commonwealth Parliament

-          Members of a State or Territory Parliament

-          A company director that is entitled to remuneration

-          People wholly or principally employed for their labour

-          People who hold or perform the duties of an appointment, office or position under the Constitution or under a law of the Commonwealth or a State or Territory

-          A person who is otherwise in the service of the Commonwealth or a State or Territory (including service as a member of the Defence Force or as a member of a police force)

Mr Day noted this definition is in contrast to other similar provisions in the ITAA 1997 which capture people that are covered by the extended super definition of employee.

“For example, under section 290-65 ITAA 1997 an employer is permitted to claim deductions for the employer contributions it makes on behalf of their employees who are either a common law employee or an employee under the extended definition of employee in the SG Admin Act,” he stated.

“As a result, while a company may be entitled to claim a tax deduction for an employer contribution it makes on behalf of a director who is age 67 to 74, that director may be prevented from also claiming a deduction for any personal contributions they make, as their duties will not towards meeting the work test for tax law purposes.”

Mr Day said that this change was likely unintended based on the wording of the Explanatory Memorandum introducing these changes.

“The EM for the Bill that introduced these changes does not indicate any intent by the government to narrow the scope of who is able to claim a tax deduction for their personal contributions,” he said.

“Given this, it is hoped the government may take action to rectify these apparent unintended consequences.”

Pending any changes to the ITAA 1997, Mr Day warned that clients in these types of circumstances need to exercise caution before making any personal contributions if they intend to claim a deduction for them.

Alternatively, where a client has already made a contribution, they may wish to hold off providing a Notice of Intent (NOI) to the trustee until the situation is clarified, he advised.

“If a member has already provided a NOI, they should exercise significant caution before commencing an income stream from that interest, as if the rules are not amended any subsequent notice to vary the deduction notice down due to the deduction being denied, will be considered invalid,” he stated.

“In this case, the amount claimed will be included in the client’s taxable income and taxed at their marginal rate, the amount of contributions tax levied on the contribution will not be able to be refunded and the amount of the contribution claimed as a deduction will count towards the member’s non-concessional contribution cap.”