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Let’s Talk About Retirement and What it Means

In our day-to-day discussions, we often encounter people who say they are “retired” or transitioning to retirement, or at least think they are. Often what they think they are doing and what they are doing in the eyes of the law can be worlds apart.

So this week, I wanted to address this issue of retirement specifically.

Firstly, to draw monies from superannuation requires you to meet a condition of release. Conditions of release vary with age. Meeting this full condition of release allows a member to draw their super benefits as a lump sum withdrawal, commence a retirement phase pension, or a combination of both. The big advantage of meeting a full condition of release is that the pension payments and the lump sum payments you make from super are tax-free. Also, the super fund itself is able to cease paying income tax on all the income and on the capital gains, i.e. a completely tax-free investment vehicle. There are some real advantages to doing this. Now to the detail of how…..

There are two ways a member can qualify as retired for super purposes. The first way, if you are under the age of 60, involves a member reaching their preservation age, having a paying job that has ended or more technically “an arrangement under which the member was gainfully employed has come to an end”. The Trustee of the super fund needs to be satisfied that the member intends never to become gainfully employed again for at least 10 hours per week in the future.

Alternatively, if a member has reached 60 years, retirement can also occur if the member ends a gainful employment arrangement after turning 60. A member’s future work intentions from the age of 60 are irrelevant. It simply provides that retirement can occur if the member ends a gainful employment arrangement after turning 60.

Regardless of which way a member satisfies the retirement definition, the critical issue is that a member has been gainfully employed. You can’t retire if you have never been gainfully employed. For super purposes, gainfully employed means “employed or self-employed for gain or reward in any business, trade, profession, vocation, calling, occupation or employment”. In the context of the retirement definitions, gainful employment is often described as having “a paid job”, but obviously, it extends more broadly to include arrangements where the member is self-employed or receiving monetary rewards other than a conventional salary.

But what about members who carry on a business via a structure such as a family trust? Arrangements are often kept informal, and as a result, a member may struggle to demonstrate they are gainfully employed. Is a member gainfully employed if they work in the business but only receive a trust distribution? What if a member is on leave from work but doesn’t have a formal employment contract to substantiate the employment arrangement in place? And has a member actually ceased an arrangement under which they are gainfully employed if they stop getting paid but keep helping out? And then there is the situation where someone resigns as a company director from their private company of which they are the main shareholder.

To ensure a member has genuinely retired for super purposes (and has not illegally accessed their benefits), it will be critical to ensure they were actually gainfully employed and have genuinely ceased that arrangement. This is the first step. The second step is to quantify what their duties were and what was the remuneration for those duties. For instance, in the example of the company director retiring, if the director had a history of being paid director’s fees and those fees were ceasing on retirement, then we would satisfy the criteria. However, if there was no remuneration payable, which is often the case with smaller private companies, relying on dividends as shareholders, then this would not constitute a legitimate cessation of an employment arrangement.

As you can see, retirement or, more importantly, satisfying the definitions of retiring are not so easy, and you need to be careful.

If today’s article provokes some questions or thoughts, feel free to reach out to us.

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