Question of the month

Claiming a tax deduction but then failing to satisfy the work test

Article published on: 23-08-2022

My client (age 68) made a personal super contribution of $200,000 (in 2022/23 FY) and claimed a tax deduction for $27,500. They then immediately commenced an account based pension to take advantage of the tax free investment returns. They are not eligible for the work test exemption but intend to satisfy the work test later in the financial year through casual employment. What happens if they fail to satisfy the work test?

Answer

From age 67, satisfaction of the work test (gainfully employed for at least 40 hours within 30 consecutive days) or work test exemption is not required to make a personal contribution to super, but is required to claim a personal tax deduction. The process to claiming a tax deduction is:

submitting a notice of intent to claim a tax deduction to the super fund
the super fund providing an acknowledgement notice to the client, and
the client claiming a tax deduction in their personal income tax return.

If the client later wants to reduce the amount of tax deduction intended to be claimed, a variation notice must be provided to the super fund. Specific timing requirements apply to submitting the notice of intent and any variation notice. Both must be submitted prior to any of the contribution being used to commence a super income stream.

Once a tax deduction is claimed and a super income stream is commenced, a valid variation notice cannot be provided to the super fund to reduce the amount of the tax deduction.

If a client has submitted a notice of intent to claim a tax deduction, commenced an income stream but fails to satisfy the work test or work test exemption for the financial year:

they cannot claim the tax deduction in their personal income tax return
they cannot provide a variation notice to the super fund
the super fund has deducted 15% tax from the amount indicated on the notice of intent that would be claimed as a tax deduction (this cannot be refunded)
the net contribution forms part of the taxable (taxed) component, and
the gross contribution will count towards the client’s non-concessional contributions cap.

In this case, despite no tax deduction claimed in the personal income tax return, the client incurs contributions tax of $4,125 ($27,500 x 15%), the net amount of $23,375 ($27,500 - $4,125) forms part of the taxable (taxed) component of the super fund and $27,500 is counted towards the non-concessional contributions cap. Usually a non-concessional contribution would have no tax deducted and form part of the tax free component of the super fund.

To mitigate this risk, instead of making a personal contribution of $200,000, a non-concessional contribution of $172,500 could have been made to the super fund and a super income stream commenced. After the commencement of an income stream, a second super contribution of $27,500 could be made. This second contribution can remain in the accumulation phase until the work test is satisfied, then:

a notice of intent to claim a tax deduction could be provided to the super fund
an acknowledgement notice from the super fund would be received by the client
the second contribution could be used to commence a super income stream (eg combined with funds from the existing super income stream to commence a new consolidated super income stream), and
the tax deduction could be claimed in the personal income tax return.