- What contributions are hit with the Division 293 tax?
- How does the super contributions surcharge (Division 293 tax) work?
- How does the ATO measure income for the purposes of the Division 293 tax?
- Everyone ends up paying the Division 293 tax
- Extra super tax for $250,000-plus income-earners (and $300,000 before July 2017)
Note: Before July 2017 (and since July 2012), anyone earning an ‘income for surcharge purposes’ of more than $300,000 pays an extra 15% tax (total of 30%) on concessional (before-tax) super contributions. Since 1 July 2017 however, the income threshold for paying the extra 15% tax on concessional contributions has been expanded to Australians earning $250,000 or more (rather than the $300,000 threshold that applied before July 2017).
On 3 May 2016, as part of its 2016 Federal Budget, the Coalition announced that, effective from 1 July 2017, the income threshold for imposing the extra 15% contributions tax will be expanded to those earning more than $250,000. This measure means that, since 1 July 2017, more Australians must pay 30% tax on super contributions.
The lower income threshold of $250,000 is now law, and took effect from 1 July 2017. Until 30 June 2017 (including for the 2016/2017 year), the income threshold of $300,000 applies.
Lowering the income threshold means that more Australians now pay the additional 15% tax (30% tax in total) on super contributions, and this measure will raise $2.5 billion over 4 years, according to the Coalition government.
The Division 293 tax is an additional 15% tax, only payable on concessional contributions made by taxpayers (or made by their employers) with an ‘income for surcharge purposes’ of greater than $250,000. (I explain in more detail what counts towards ‘income for surcharge purposes’ later in the article).
Before July 2017 (that is, for the 2016/2017 year, and for the 2015/2016, 2014/2015, 2013/2014 and 2012/2013 years), anyone with an ‘income for surcharge purposes’ of more than $300,000 (including rental property losses and other items) in a financial year, pays 30% tax on concessional contributions, doubling the super contributions tax bill for high-income earners.
The regular contributions tax (flat rate of 15%), payable when a super contribution is processed by a super fund, is applicable to all concessional (before-tax) contributions of taxpayers with an ‘income for surcharge purposes’ of less than $250,000, and also applicable to taxpayers with an ‘income for surcharge purposes’ of more than $250,000.
Note: The additional 15% tax on concessional super contributions for high-income earners is known as the ‘Division 293 tax’, and this extra tax is payable after the taxpayer lodges his or her tax return. The regular 15% contributions tax is usually collected when a concessional super contribution is processed by a super fund.
According to the explanatory memorandum (Chapter 4) accompanying the legislation, “lowering the threshold at which the Division 293 tax applies ensures that the tax concession provided to those on high incomes is more closely aligned with the tax concession provided to low and middle-income earners”.
What contributions are hit with the Division 293 tax?
Concessional contributions include Superannuation Guarantee (SG) contributions, salary sacrifice contributions and tax-deductible super contributions.
Note: If you’re a member of a defined benefit fund (funded or unfunded schemes), then ‘concessional contributions’ for the purposes of the super contributions Division 293 tax (extra 15% tax on concessional contributions) will include all of your notional employer contributions. According to the ATO, an ATO determination regarding a defined benefit fund member’s Division 293 tax may involve a deferral of the payment date of the Division 293 tax until the super benefit can be paid to the member.
How does the super contributions surcharge (Division 293 tax) work?
The double tax for high-income earners has applied since 1 July 2012 (from the 2012/2013 year). The extra tax was announced by the former ALP government in the May 2012 Federal Budget, and was not repealed by the Coalition government. At the time of this May 2012 announcement, I commented that the latest batch of Labor ministers don’t have a political memory. The Liberal party introduced a similar tax in 1996, and it ended up costing all super fund members via a massive hike in administrative costs. The shocking debacle, when introduced by the Liberal party, cost the super industry and fund members as much money to administer the super surcharge, as the government collected in extra super taxes. I will explain how the extra tax for high-income earners will hit all super fund members later in the article.
The ATO calls this extra 15% tax, the ‘Division 293 tax’ based on the legislative provision that outlines the extra tax, although I consider it more appropriate to call the tax, a super contributions surcharge. Note that the term surcharge is also how the ATO originally described this extra tax on its website, and the term ‘surcharge’ still appears frequently on the ATO website when explaining how the Division 293 tax works, but not everywhere.
Important: You can choose to pay the Division 293 tax directly from your own private savings, or arrange for your super fund to pay the extra tax from your super account.
How does the ATO measure income for the purposes of the Division 293 tax?
The big question is, how does the federal government measure a person’s income to determine if the person’s income for surcharge purposes is more than $300,000 a year (for the 2016/2017 year, and earlier financial years), or $250,000 a year (for the 2017/2018 year, and future years)? Is it based on the salary package that you negotiate, or your taxable income, or something else?
According to the ATO, the definition of ‘income’ for Division 293 tax purposes includes:
- taxable income (assessable income minus allowable deductions)
- total reportable fringe benefit amounts
- net financial investment loss
- net rental property loss
- net amount on which family trust distribution tax has been paid
- concessional super contributions made within the concessional cap for the financial year (known as ’low-tax contributions for the purposes of this calculation)
LESS super lump sum taxed elements with a zero tax rate (in other words, lump sum super benefits made up of the taxable component that are tax-free due to the low-rate cap).
Note: According to previous information published by the federal government, “if an individual’s income excluding their concessional contributions is less than the $300,000 threshold [for the 2016/2017 year], but the inclusion of their concessional contributions pushes them over the threshold, the reduced tax concession will only apply to the part of the contributions that are in excess of the threshold.” The government provides an example of how this adjustment would work for a taxpayer who finds himself in this position: If a person has income of $285,000 but also has concessional contributions of $20,000, this takes total income to $305,000. The super contributions surcharge (Division 293 tax) of 15%, on top of the standard contributions tax of 15%, would only apply to $5,000 of the person’s super contributions.
The actual calculation for working out the surcharge (Division 293 tax) can be rather convoluted and the ATO explains it on the ATO website: Click here to learn more.
Other key facts about the super contributions surcharge (Division 293 tax) include:
- Ironically, the federal government realises the insanity of combining the current excess contributions tax regime with a superannuation contributions surcharge, by ensuring that the super surcharge does not apply to concessional contributions which exceed the concessional contributions cap (and this is because these excess contributions are potentially subject to the excess contributions tax or the person’s marginal tax rate).
- The additional 15% contributions surcharge (taking the contributions tax rate to 30% for high-income earners) does not affect the 15% earnings tax on super fund earnings, or the tax exemption on fund assets financing retirement pensions.
Everyone ends up paying the Division 293 tax
Despite the original government media spin, those on $250,000-plus salaries (and before July 2017, those on $300,000-plus salaries) are not the only ones who will be hit by the super surcharge. Other taxpayers who may be hit with the extra 15% (30% in total) tax on concessional super contributions include:
- low-income earning and middle-income earning individuals retiring (in the financial year they retire) can potentially be affected, although superannuation lump sum taxed elements with a zero tax rate are deducted from the income calculation. Note that lump sum taxed elements with a tax rate are counted towards income for the Division 293 tax, which I presume applies to those who retire before the age of 60, and also applies to those taking benefits from older public sector funds.
- investors selling assets such as properties or shares (in the year they sell).
- other individuals who receive lumpy income (such as women who have re-entered the workforce and trying to catch up on earnings after time out of the workforce, and small business people).
- administrative cost and hassle for all super funds introducing and maintaining software systems to track and collect the extra tax for a minority of members. The super funds will pass on these costs to all super fund members.
The tax impact for those affected by the Division 293 tax is set out in the table below.
Extra super tax for $250,000-plus income-earners (and $300,000 before July 2017)
|Super contributions||15% contributions tax||30% (contributions tax + Division 293 tax)||Extra contribution tax payable|
|Maximum employer is required to contribute as SG (approx.) (for 2017/2018 year)||$20,049||$3,007||$6,014||$3,007|
|Concessional contributions cap for 2017/2018 year||$25,000||$3,750||$7,500||$3,750|
|Maximum employer is required to contribute as SG (approx.) (for 2016/2017 year)||$19,616||$2,942||$5,884||$2,942|
|General concessional contributions cap for 2016/2017 year, or for 2015/2016 year, or for 2014/2015 year||$30,000||$4,500||$9,000||$4,500|
|Concessional cap for over-49s* for 2016/2017 year, or for 2015/2016 year, or for 2014/2015 year||$35,000||$5,250||$10,500||$5,250|
|General concessional contributions cap for 2013/2014 year||$25,000||$3,750||$7,500||$3,750|
|Concessional cap for over-60s** for 2013/2014 year||$35,000||$5,250||$10,500||$5,250|
* If you were aged 49 years or older on 30 June 2016, then your concessional cap for the 2016/2017 year is $35,000. If you were aged 49 years or older on 30 June 2015, then your concessional cap for the 2015/2016 year is $35,000. Likewise, if you were aged 49 years or older on 30 June 2014, your concessional cap for the 2014/2015 year is $35,000. If you were aged 48 years or younger on 30 June 2016, or 30 June 2015, or 30 June 2014, then your concessional cap was $30,000 for the 2016/2017 year or 2015/2016 year or 2014/2015 year respectively.
** If you were aged 59 years or older on 30 June 2013, then your concessional cap for the 2013/2014 year was $35,000. If you were aged 58 years or younger on 30 June 2013, then your concessional cap for the 2013/2014 year was $25,000.
For information on the other 1 July 2017 superannuation changes (as announced in the 2016 Federal Budget, and which are now law), see SuperGuide article Latest superannuation changes: 2017/2018 guide.