Nick Bruining: How older small business owners can navigate the work test hurdle and still top up their super

As we approach the end of the financial year, a warning has been issued to older small business operators hoping to make voluntary concessional contributions to superannuation — make sure you satisfy employment rules before sending any money to your fund.

It particularly affects those who operate their business through a trust or as a director of a proprietary limited company. Those affected might not be able to make their own tax-deductible contributions to super.

Seniors aged over 67 and up to 74 are currently required to satisfy a work test in order to make a concessional contribution. This requires an individual to complete 40 hours of work in a consecutive 30-day period in the financial year they make the contribution.

You can satisfy the test working as an employee or as a self-employed individual. The employment must be “for gain or reward” and, therefore, voluntary work doesn’t pass the test.

A concessional contribution is one where a tax deduction is claimed. These include the 12 per cent super guarantee contributions, salary-sacrificed amounts and personal contributions where a deduction is claimed.

In limited cases, you may be able to satisfy a special work test exemption

To qualify for the exemption, an individual must have a total superannuation balance of less than $300,000, have satisfied the work test in the previous financial year and not previously made use of the exemption.

There is a potential issue for people who run a business through a company or trust and just draw down passive income in the form of dividends or distributions. That’s instead of being an employee and receiving salary and wages.

These “passive” arrangements where there’s no actual work performed do not satisfy the definition of employment for tax purposes.

Structures like these are quite common. In the case of a trust — typically a discretionary family trust — the income is distributed by the trustee of the trust to the beneficiaries, who may or may not actually be an employee of the business. In the case of a company, distributions are made as dividends to the shareholders of the company.

Both arrangements won’t satisfy the definition of being an employee or self-employed. It is a type of “no-man’s land”. In essence, the entity is doing the work, not the individual.

The obvious solution is to simply add the individual as an employee, but this may trigger other issues. As an employee, you will need to set up pay-as-you-go withholding tax arrangements, compulsory super guarantee payments and possibly worker’s compensation insurance.

Those potentially affected need to work out what they are going to do before the end of the financial year. If your claim is subsequently denied, you might find that you’ll be paying tax at your personal marginal tax rate on the contribution.

With just seven weeks to go until the end of the financial year, you still have time to change your arrangements or to determine that the potential tax deduction might not be worth the effort.

Nick Bruining is an independent financial adviser and a member of the Certified Independent Financial Advisers Association