Labor wrong to oppose abolishing 10% rule and work test

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Federal Budget 2016/17, Budget 2016, superannuation, Labor oppose removing work test and 10% ruleOpinion – Labor has managed to snatch a superannuation policy defeat from the jaws of victory with the announcement that they will oppose removing the 10% rule and the work test.

The superannuation industry has long campaigned for the removal of these complicating and confusing restrictions. Labor says Australia “cannot afford” these changes, which are estimated to cost the Budget $1.13 billion over the forward estimates.

Why should the ability to claim a tax deduction for super contributions be confined to those who only earn a small fraction, or less, of their income from employment – as the 10% rule does? Though employees may be able to make salary sacrifice contributions this requires the support of the employer and can have Super Guarantee implications.

John Daley, CEO of the Grattan Institute, said that Labor was wrong to oppose this measure:

If pre-tax voluntary contributions are allowed at all, there is no rational basis for limiting this to employees with more sophisticated employers.

In a submission to the Financial System Inquiry the Institute of Public Accountants called for the the repeal of the 10% rule, saying:

The IPA believes the source of the concessional contribution should not matter and that this particular item of legislation should be repealed. It is felt that Australians should be subject to a concessional contributions cap that does not discriminate against the source of the contribution.

Why should the ability of older Australians to contribute to super be based on how much they work? In a pre-Budget submission ahead of the 2016 Budget the Australian Institute of Superannuation Trustees (AIST) recommended that the work test be abolished:

The work test was designed for an earlier period, where superannuation benefits were subject to a reasonable benefit limit imposed through use of taxation, and the use of such disincentives tacitly noted that one’s life expectancy was shorter.

We view the imposition of this requirement to be unnecessary, as well as being unable to be enforced. The removal of this limitation will enable all Australians to contribute as well as allow superannuation funds to get on with their job of processing contributions, unencumbered by this layer of regulation.

Unfortunately so much attention is directed at the $500,000 lifetime non-concessional contribution cap, and not the other changes in the Budget which will impact far more people.

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4 thoughts on “Labor wrong to oppose abolishing 10% rule and work test”

  1. I don’ think that I understand the 10% Super rule, but here goes:

    Perhaps not a typical circumstance but in theory, if retired, aged 68, substantially unemployed except the person passes the work test receiving a small income of, say, $1,000 from an employer and receives no other other assessable income except, say, $100,000 due to being a beneficiary of a family trust then that person is entitle to make Pre Tax Super Contributions from that $100,000???

    And the sole reason why this person could make Super contributions is the extra $500 employee income on top of the $100,000??

    The above conclusion simply can’t be right, can it??

    If correct then Labor wishes to retain this rule??

    That makes no sense to me whatsoever so maybe I have it all wrong??

    1. Setting aside that example, which involves several overlapping issues (and I’m not sure where the $500 comes from), I think you’ve got the right idea – only people with a small proportion (or none) of their income coming from employment can claim tax deductions for personal super contributions. There are details on the rules on the ATO’s website.

      1. Oops, sorry Luke, the reference to $500 should have been $1,000 – which came from 40 hours work from an employer.

        Thank you, I have watched the suggested Tax Video ….. I think that I get the message but it still makes no logical sense to me???

        Assessable income is still a person’s ‘income’ so I ask rhetorically …. does it really matter if my emoloyer’s income is 10.1% more than my self employed income in respect to being able to make Pre Tax Contributions to Super??? There must be another picture that I can’t see???

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