The number of people working after turning 65 is increasing. The workforce participation rate in Australia for people aged 65 and over increased from 5.3 per cent in 1990 to 6.2 per cent in 2000. And in March 2016, the rate increased to 13 per cent.
Working past the age of 64 affects two areas in personal finance. The first is superannuation contributions and the second is how much a person qualifies for from the age pension under Centrelink income-test rules.
Once a person turns 65, if they want to continue making personal concessional tax-deductible super contributions and non-concessional super contributions, they must pass the work test. To do this, they must be gainfully employed for at least 40 hours in a period of not more than 30 consecutive days in the financial year that the contribution is made.
Thankfully, when it comes to making super contributions, gainfully employed is defined as being employed or self-employed for gain or reward in any business, trade, profession, vocation, calling, occupation or employment. Gain or reward covers income received in return for personal services provided in the form of salary, business income, bonuses and commissions.
For someone who has a self-managed super fund, it would not be acceptable for them just to sign a document that states that they met the work test. In addition, there would need to be a record, such as a PAYG withholding statement or a record of hours worked in a business, with the relevant income received being declared on their tax return.
Tougher rules for the age pension
Unfortunately, when it comes to the Centrelink rules relating to a person qualifying for the age pension, the only income earned that receives special treatment and maximises the amount of pension received is employment income.
In 2009, a new work bonus system was introduced that affects the way employment income is treated under the income test. Under the old test, a person had to be receiving employment income to benefit from the work bonus; however, under the current work bonus system, a person does not have to work to receive the benefit of the bonus. The bonus amount is $250 a fortnight, which is deducted from a person’s salary or wages. If a person does not work, the work bonus accumulates until it reaches a maximum of $6500.
If a person is working, the fortnightly amount they earn is decreased by the $250 allowance amount. Where the amount earned is less than $250, the difference between the amount earned and the $250 bonus amount is added to the work bonus balance. Where the amount earned is more than $250, the income earned is reduced by the $250, and is further reduced by any work bonus balance that has accumulated.
Because the work bonus relates only to employment income and, unlike the work test for superannuation, does not apply to a share of business income, people who work in a business as a sole trader, through a partnership or a trust, and receive only a share of the profits for their work, or who receive only dividends from a company, are not eligible for the work bonus.
Advisers with clients owning a business as a sole trader or through a partnership should consider recommending that they change the entity that owns the business to a trust or a company that employs them.
There are costs involved in switching to another entity, but these are far outweighed by the potential to increase a married couple’s entitlement to the age pension by $3250 each, a year, through being able to access the work bonus system.