Voluntary contributions

8.30 People aged under 65 may enter into arrangements with employers to deduct money from their wages and pay it into their superannuation accounts. These are known as voluntary contributions. However, people aged 65–74 are not permitted to make voluntary contributions to superannuation unless they meet a work test. They must be ‘gainfully employed’ for at least 40 hours over a 30-day period in the financial year.[39] People aged 75 years and over are not permitted to make voluntary contributions at all.[40]

Is the work test a participation incentive?

8.31 The ALRC has not found evidence that the age-based restrictions on contributions constitute a barrier to mature age workforce participation. The restrictions might amount to a barrier if the inability to contribute to superannuation, and the loss of access to the associated tax concessions, discouraged people from working. However, the decision to work or retire does not appear to be significantly influenced by the availability of tax concessional saving. The major determinants of retirement are discussed later in this chapter, and include ‘reaching retirement age’, eligibility for superannuation or a pension, sickness, injury or disability, and care responsibilities.[41]

8.32 The Australian Government has indicated that the work test is intended to ensure that people aged 65–75 can only make voluntary contributions when ‘they maintain a bona fide link with the paid workforce’.[42] The Explanatory Statement to an amendment to the regulations regarding the work test indicated that allowing contributions only to people in the workforce is consistent with superannuation’s ‘intended role as a retirement vehicle. Without a work test people could abuse the taxation concessions provided to superannuation’.[43]

8.33 There is no suggestion in the Explanatory Statements that the work test was designed as a workforce participation incentive. A work test intended to encourage mature age workers to make a substantial commitment to work would be set at a higher level than the present test.

8.34 Further, it does not appear that the work test is, in fact, a workforce participation incentive. When making a decision whether to work or retire, people take into account their personal preferences, health, income, and caring responsibilities.[44] As the Financial Services Council submission put it, those who work past 65 are likely to do so either because they ‘genuinely wish to work, or have inadequate retirement savings and therefore have a financial need to continue working’.[45] In either case, the presence or absence of a work test for superannuation contributions does not appear to drive the decision to work.

8.35 Finally, if the work test does have a workforce participation function, it is not well targeted. For example, the Association of Independent Retirees (AIR) noted that Australian Tax Office (ATO) statistics show that only about 10% of the three million people aged 65 and over paid tax above the 15% marginal rate.[46] The reason people invest in superannuation rather than elsewhere is the concessional tax rate of 15% on contributions and earnings. The work test could only motivate a person to work (in order to contribute to superannuation) if the person is paying more than 15% tax on their income. Therefore, only the 300,000 taxpayers identified by the AIR have an incentive to work and contribute to superannuation. These people are likely to have the highest incomes in their cohort. Financial incentives for workforce participation are more likely to be effective if they are directed to low to middle income earners, rather than to the highest 10%.

8.36 The ALRC concludes that the work test for superannuation contributions by people aged 65–75 appears not to have a significant impact on workforce participation by this age group. However, stakeholders raised a range of other concerns about the work test, and these are outlined in the next section.

Reviewing the work test

8.37 As noted above, the work test is intended to ensure that the superannuation system is used by working people to save for their retirement. There is some doubt as to whether the work test, as presently framed, achieves this goal. The ALRC recommends that the Australian Government review the work test to determine whether the test is necessary, and whether it achieves its policy objective.

The integrity of the superannuation system

8.38 Without a link between contributions and work, superannuation moves away from its purpose as a retirement savings scheme. It becomes ‘a more generalized savings mechanism that can also be utilized by people who are outside the workforce’.[47] Stakeholders in the superannuation industry indicated that the work test is intended to ‘prevent abuse of a low tax environment’[48] and to ‘maintain a level of integrity for the superannuation system’.[49]

8.39 The work test may not be effective in maintaining the link between contributions and work. Contributions do not have to be sourced from work-related income. A person 65 or over can work for as little as 40 hours in a year and contribute up to $25,000 from non-work income (for example, from inheritance, rent or dividends).

8.40 The Law Council suggested that, while the work test was originally ‘an “integrity” measure to avoid excessive accumulation in a tax concessional environment’, it is no longer needed because contribution caps now perform this function.[50] Abolition of the work test would improve system coherence because contribution rules would then be the same irrespective of a member’s age.[51] The Council was concerned, however, that removing the work test might be a disincentive to work. For the reasons given above, the ALRC does not consider this to be a risk.

Does the work test cater for older people’s work patterns?

8.41 The current work test of 40 hours in 30 days replaced a test which required at least 10 hours work per week. It was intended to be consistent with work patterns of older people who ‘prefer to work on an irregular part-time basis’.[52] Despite this change, there are still concerns that the work test is not sufficiently flexible. Women In Super pointed out that the work test ‘excludes workers who … might work a significant number of hours in blocks’.[53] Such workers might include exam invigilators or polling officials.[54]

8.42 Suggestions for reform included the removal of the work test,[55] or the replacement of the work test with a test based on:

  • earnings or superannuation balance;[56]

  • a minimum number of hours per year;[57] or

  • a requirement that funds contributed come from work-related income.[58]

8.43 The Australian Council of Trade Unions (ACTU) suggested that the work test under the Paid Parental Leave Scheme might be a suitable model. This test is significantly more stringent than the current work test, requiring work for at least 330 hours in 10 months.[59] Some stakeholders supported the work test in its current form,[60] and others thought that increasing the amount of work required might be appropriate.[61]

Compliance with the work test

8.44 The Australian Institute of Superannuation Trustees (AIST) raised concerns about compliance with the work test:

Currently, it is left to the member’s discretion to confirm that they satisfy the work test and it is not actively audited by superannuation funds. Therefore, there is an opportunity for people to take advantage of this and make contributions when they have not worked, knowing they are unlikely to be audited.[62]

8.45 AIST suggested that increased auditing by the ATO might be necessary.

The nature of the review

8.46 In the light of the concerns raised above, the ALRC considers that the Government should review the work test to determine whether it is meeting its policy objective. This Inquiry has considered whether the age-based work test for superannuation contributions is a barrier or disincentive to work. The ALRC has concluded that it is not likely to have a significant impact on workforce participation by people aged 65–75 years. A further review should consider more broadly whether the work test is necessary for maintaining the integrity of the superannuation system. It should also consider whether the current settings are suitable for achieving this objective.

8.47 This review should also consider the work test for the government co-contribution, discussed further below. The work test for the government co-contribution is 10% of total income from work. It is different from the work test for voluntary contributions and spousal contributions, which is 40 hours in 30 days. It would contribute to system coherence if the work tests were the same. This review should consider whether the work test for voluntary contributions and spousal contributions should be consistent with the work test for the government co-contribution.

Recommendation 8–1 The Superannuation Industry (Supervision) Regulations 1994 (Cth) prohibit contributions by members aged 65–74 unless the member meets a work test. The work test requires the member to work for at least 40 hours over a 30-day period in the financial year. The Australian Government should review the work test and consider:

(a) the policy objective of the work test;

(b) whether that policy objective remains relevant;

(c) how the work test contributes to achieving that policy objective; and

(d) whether the work test in the Superannuation (Government Co-contribution for Low Income Earners) Act 2003 (Cth) should be consistent with the work test in the Superannuation Industry (Supervision) Regulations 1994 (Cth).

Workers 75 years and over

8.48 A person over 75 years may not make voluntary contributions to superannuation, and therefore cannot access the tax advantages of this form of saving. In the Discussion Paper, the ALRC asked if this restriction should be removed and the work test extended to people over 75 years.[63]

8.49 Some stakeholders suggested that removing the restriction and extending the work test would encourage workforce participation by people 75 years and over.[64] However, for reasons similar to those set out above in relation to workers aged 65–75 years, the ALRC is not convinced that such a change would have a significant impact on workforce participation. The predominant determinants of the decision to work or retire include personal preference, health and disability, financial security and caring responsibilities. There does not appear to be evidence that the opportunity to contribute to superannuation would create an incentive to work. If it did so, the incentive would only exist for those people 75 years and over who have a marginal tax rate higher than 15%, who are the highest earning workers in this age bracket.

8.50 The ALRC has received submissions from stakeholders who report that age-based restrictions are objectionable because of their discriminatory nature.[65] However, identifying age-based discrimination is not in itself a sufficient justification for removing the age-based restrictions on contributions. The superannuation system is an age-based scheme. It both compels and encourages younger people to save for their retirement. Some age-based rules are essential to ensure that superannuation is used for retirement savings, rather than for tax minimisation or for estate planning purposes.[66]

8.51 Stakeholders also raised concerns that the restrictions discourage people who are 75 years and over from saving for their retirement.[67] While the ALRC notes such concerns, contributions made at this age do not necessarily have the advantage of significant long term investment returns.

8.52 Many stakeholders considered that people aged 75 years and over should be able to make contributions subject to a work test, in the same way as people aged 65–75.[68]

8.53 One submission suggested that both age restrictions on contributions and the work test should be removed altogether, in order to eliminate age discrimination.[69] Similarly, as the Law Council points out, removing the age-based restrictions might improve system coherence as the rules would be consistent for members of all ages.[70]

8.54 There are considerable concerns about the age-based restrictions on voluntary contributions. The ALRC makes no recommendation as it has not been convinced that these restrictions affect workforce participation. The ALRC also considers that some age-based restrictions are justified in superannuation legislation. However, the Australian Government should consider removing the restriction on contributions by people 75 years and replacing it with a work test. This approach could alleviate concerns about age discrimination without undermining the retirement savings objective of the system. Such a change has the potential to affect revenue, but if the work test is retained, the impact would be minor. At present, very few people over 75 are in the work force.

Some consequential changes

8.55 If the Government decides to remove the age limit on voluntary contributions, two consequential reforms will be necessary. First, employers should be able to claim income tax deductions for voluntary contributions made for employees aged over 75.[71] If voluntary contributions are tax deductible then employers can offer employees aged over 75 access to salary sacrifice arrangements. Without this option, the benefits of removing the age limit on voluntary contributions would be significantly limited.

8.56 Secondly, self-employed workers should be able to claim income tax deductions for contributions made from the age of 75 years.[72] Extending the deduction to the self-employed ensures fair and consistent treatment.

8.57 Stakeholders uniformly agreed that if the age limits for employees were removed, then the contributions should be tax deductible for both employers and self-employed workers.[73]

[39]Superannuation Industry (Supervision) Regulations 1994 (Cth) regs 7.01, 7.04. ‘Gainful employment’ is employment or self-employment ‘for gain or reward in any business, trade, profession, vocation, calling, occupation or employment’: reg 7.01(3).

[40] Ibid reg 7.04.

[41] Australian Bureau of Statistics, Retirement and Retirement Intentions, Australia, July 2010 to June 2011, Cat No 6238.0 (2011). There is no compulsory retirement age in Australia, but ‘reached retirement age/eligible for superannuation/pension’ is a reason for retirement in the ABS survey. Certain occupational groups, such as judges and military personnel, have compulsory retirement provisions: see Chapter 4.

[42]Explanatory Statement, Superannuation Industry (Supervision) Regulations (Amendment) No 117 1997 (Cth) Attachment B.

[43] Explanatory Statement, Superannuation Industry (Supervision) Amendment Regulations (No 4) 2004 (Cth).

[44] The determinants of retirement are discussed in more detail below.

[45] Financial Services Council, Submission 89.

[46] Association of Independent Retirees, Submission 59.

[47] A Borowski, ‘Back at the Crossroads: The Slippery Fish of Australian Retirement Income Policy’ (2008) 43 Australian Journal of Social Issues 311, 329.

[48] Women in Super, Submission 64.

[49] Australian Institute of Superannuation Trustees, Submission 77.

[50] Law Council of Australia, Submission 96.

[51] Ibid.

[52] Explanatory Statement, Superannuation Industry (Supervision) Amendment Regulations (No 4) 2004 (Cth).

[53] Government of South Australia, Submission 95; ACTU, Submission 88; Australian Institute of Superannuation Trustees, Submission 77; Women in Super, Submission 64; Association of Independent Retirees, Submission 59.

[54] Women in Super, Submission 64.

[55] Government of South Australia, Submission 95; Financial Services Council, Submission 89; Association of Independent Retirees, Submission 17.

[56] Association of Independent Retirees, Submission 17.

[57] Australian Institute of Superannuation Trustees, Submission 77.

[58] Australian Chamber of Commerce and Industry, Submission 44.

[59] ACTU, Submission 88.

[60] National Seniors Australia, Submission 92; P Gerrans, Submission 74.

[61] Australian Industry Group, Submission 97; DOME Association, Submission 62.

[62] Australian Institute of Superannuation Trustees, Submission 77.

[63] Australian Law Reform Commission, Grey Areas—Age Barriers to Work in Commonwealth Laws, Discussion Paper 78 (2012), Proposal 8–1.

[64] National Seniors Australia, Submission 92; Brotherhood of St Laurence, Submission 86; Suncorp Group, Submission 66.

[65] National Welfare Rights Network (NWRN), Submission 99; Government of South Australia, Submission 95; National Seniors Australia, Submission 92; Financial Services Council, Submission 89; COTA, Submission 51;National Seniors Australia, Submission 27;Olderworkers, Submission 22; My Longevity Pty Limited, Submission 15.

[66] P Gerrans, Submission 74; Law Council of Australia, Submission 46.

[67] Government of South Australia, Submission 95; Financial Services Council, Submission 89; Suncorp Group, Submission 66; COTA, Submission 51; National Seniors Australia, Submission 27.

[68] National Welfare Rights Network, Submission 99; Law Council of Australia, Submission 96; Australian Industry Group, Submission 97; Government of South Australia, Submission 95; National Seniors Australia, Submission 92; Financial Services Council, Submission 89; ACTU, Submission 88; Brotherhood of St Laurence, Submission 86; Australian Institute of Superannuation Trustees, Submission 77; P Gerrans, Submission 74; Suncorp Group, Submission 66; Women in Super, Submission 64; Women’s Equity Think Tank, Submission 63; Brotherhood of St Laurence, Submission 54(age restrictions should be replaced with eligibility based on account balance); COTA, Submission 51; Australian Institute of Superannuation Trustees, Submission 47; Australian Chamber of Commerce and Industry, Submission 44; Media Entertainment & Arts Alliance, Submission 33; National Seniors Australia, Submission 27;Olderworkers, Submission 22.

[69] Association of Independent Retirees, Submission 17.

[70] Law Council of Australia, Submission 96.

[71]Income Tax Assessment Act 1997 (Cth) s 290–80 currently prevents employers claiming these deductions.

[72] Ibid s 290–165(2) currently prevents self-employed workers claiming these deductions.

[73] Australian Industry Group, Submission 97; Law Council of Australia, Submission 96; Government of South Australia, Submission 95; National Seniors Australia, Submission 92; Financial Services Council, Submission 89; ACTU, Submission 88; Brotherhood of St Laurence, Submission 86; Australian Chamber of Commerce and Industry, Submission 85; Australian Institute of Superannuation Trustees, Submission 77; Suncorp Group, Submission 66; Women in Super, Submission 64.