APRA releases guidance on retirement definition
Updated APRA guidance that outlines the definition of retirement for individuals with multiple employment arrangements could also have implications for SMSFs.
The Australian Prudential Regulation Authority (‘APRA’) has just updated its Superannuation Prudential Practice Guide SPG 280 — Payment Standards (‘SPG’) in June 2017. Of interest in the SPG are APRA’s comments on the retirement definition in the Superannuation Industry (Supervision) Regulations 1994 (Cth) (‘SISR’), in particular it is useful to see APRA’s confirmation that a member that reaches 60 and has two or more employment arrangements will meet the definition of retirement if they ceases one of these employment arrangements. While APRA is not the regulator for SMSFs, its comments and interpretation of legislation are influential, including for the ATO.
With the introduction of the term ‘retirement phase’ pensions post 1 July 2017, it is now more important than ever to consider whether a member can start an account-based pension (‘ABP’) or convert their existing transition to retirement income stream (‘TRIS’) into an ABP. Only retirement phase pensions, such as ABPs, will be able to claim the pension exemption post 1 July 2017 on investment returns on assets used to support the pension. On the other hand, transition to retirement income streams (‘TRIS’) are not initially classed as retirement phase pensions and therefore cannot claim the pension exemption until they enter retirement phase once an appropriate condition of release is met and the trustee is notified (except for attaining age 65, where no notification is needed).
The definition of retirement
Retirement is a condition of release with a nil cashing restriction and satisfying this definition will allow members to commence an ABP.
The definition of retirement is found under reg 6.01 of the SISR, which provides that retirement can happen under either of the following two limbs:
- Limb 1 — for a person who has reached their preservation age, the person is taken to be retired if:
- an arrangement under which the person was gainfully employed has come to an end; and
- the trustee is reasonably satisfied that the person intends never to again become gainfully employed, either on a full-time or a part-time basis; or
- Limb 2 — for a person who has reached the age of 60, the person is taken to be retired if an arrangement under which the person was gainfully employed has come to an end, and either:
- the person attained 60 on or before the ending of the employment; or
- the trustee is reasonably satisfied that the person intends never to again become gainfully employed, either on a full-time or a part-time basis.
As you can see above, the definition of retirement is different for people who have reached preservation age but are less than 60 and for those who have attained the age of 60. The requirements under limb 1 require both criteria to be satisfied, whereas limb 2 only needs either of the listed criteria to be satisfied.
Part-time is defined to mean gainfully employed for at least 10 hours, and less than 30 hours, each week (reg 1.03(1) of the SISR).
Working two or more jobs
For limb 2 of the definition, those over 60 have some greater flexibility to meet the definition since that limb only requires that ‘an arrangement under which the member was gainfully employed has come to an end’ and that the person attained 60 before the ending of the employment. This will mean that a person who works two genuine jobs can be taken to retire if one job comes to an end after age 60, even if the other job continues. APRA’s SPG confirms this at para 22:
Where a member has reached the age of 60, is in two or more employment arrangements at the same time, and ceases one of these employment arrangements, this is a valid condition of release in respect of all preserved and restricted non-preserved benefits accumulated up until that time. However, it is APRA’s view that this will not change the character of any preserved or restricted non-preserved benefits that accrue after the condition of release has occurred. A member will not be able to cash any further benefits or investment earnings accrued from another existing employment arrangement, or any benefits or investment earnings from a new employment arrangement, until a further condition of release occurs.
What this means is that members could meet the definition of retirement when they cease one role even if the remaining job had the greater number of hours and a higher remuneration. For example, for a person who is over 60 with a full time job and a side job as a genuine self-employed Uber driver can meet the retirement definition by genuinely ceasing only the Uber job.
What is ‘gainful employment’?
It is not possible to meet the retirement definition by simply ceasing any job, work or task. Under both limbs, members must actually cease gainful employment.
The question then becomes, what does it mean to be gainfully employed? Gainfully employed is defined to mean employed or self-employed for gain or reward in any business, trade, profession, vocation, calling, occupation or employment (reg 1.03(1) of the SISR). This definition is narrower than many realise because both requirements ‘employment or self-employment’ and ‘for gain or reward’ are mandatory prerequisites.
To satisfy the definition, the test to determine whether or not there is employment is a multi-factor legal test based on things such as degree of control, who bears the risk of the venture, whether standard working hours exist, etc. Accordingly, not every job, work or task will be regarded as gainful employment. Take for example the following: a director of a small private company is unlikely to be gainfully employed by virtue of holding that role since a being a director alone is not necessarily employment and is not necessarily under any contract of service (see Beljan v Energo Form Act Pty Ltd  ACTMC 21 ). On the other hand, a person who is genuinely driving for Uber, as a paid form of self-employment, is likely to satisfy the retirement definition if they were to cease this role.
By Gary Chau, lawyer, and David Oon, senior associate, DBA Lawyers