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For most high income earners, saving for your retirement through super is a sensible strategy, but you need to watch you don’t fall foul of the dreaded Division 293 tax.
This delightfully named tax is an extra charge imposed on super contributions made by higher income earners. It is designed to reduce the tax benefits high income earners receive from the super system and to level the tax playing field somewhat for average income earners.
From 1 July 2017, the combined income and super contribution annual threshold after which Division 293 tax applies is $250,000. In prior years (from 1 July 2012), the income threshold was $300,000.
Note: The Government’s rationale for lowering the threshold for paying Division 293 tax was it would better target the tax concessions provided within the super system and ensure it remained equitable and sustainable – not to increase the amount of tax revenue it collected. It claimed the lower threshold more closely aligned the tax concessions provided to those on high incomes with those given to low and middle income Australians.
Division 293 tax: What it means for high income earners
If your income plus any concessional (before-tax) super contributions is more than $250,000 in a particular financial year you are liable for Division 293 tax of 15% on the amount of concessional contributions above the $250,000 threshold.
Where your income excluding your concessional contributions is under the threshold but your concessional contributions push you over the limit, the extra tax will only apply to concessional contributions exceeding the threshold.
Division 293 tax is applied because as a high income earner, your marginal or top tax rate for income amounts over $180,000 is 45% (in 2019/2020). When you make a concessional contribution into your super account, however, you only pay a 15% tax rate.
This means you are receiving a bigger saving on you tax bill than an average income earner (whose marginal tax rate may only be 32.5% in 2019/2020).
To make things fairer, Division 293 imposes an additional tax of 15% on higher income earners to bring the amount of tax they save on their super contributions back into line with those received by average income earners.
Watch those big earning years
Unfortunately, Division 293 tax is applied even if your income goes over the $250,000 threshold due to a one-off event such as making a capital gain, receiving an eligible termination payment, or a big salary bonus.
In these situations, the tax rate for your super contributions during that tax year will increase if you exceed the current threshold, but will drop the following year if your income goes back under the Division 293 threshold.
How does the Division 293 tax work?
You are only required to pay Division 293 tax if your income and super contributions for Division 293 purposes exceeds the current annual threshold ($250,000 in 2019/2020).
You will be liable for the extra tax on either your taxable super contributions, or the amount that is over the current threshold – whichever amount is lower.
In 2017/2018, Ayumi was assessed by the ATO as having Division 293 income of $315,000 and $25,000 in Division 293 super contributions.
Ayumi’s super fund paid the normal contributions tax of $3,750 on her contribution when it was paid into her super account (15% x $25,000).
As Ayumi’s income is over the $250,000 threshold, she is also liable for Division 293 tax on her super contribution.
Her taxable contribution for Division 293 tax purposes is whichever is the lesser amount:
- Division 293 super contributions = $25,000
- Income plus Division 293 super contributions above the $250,000 threshold is: $315,000 + $25,000 = $340,000
$340,000 – $250,000 = $90,000
The ATO calculates the lesser amount for Ayumi for Division 293 purposes in 2017/2018 is $25,000, as this amount is less than $90,000.
As Ayumi is over the threshold for Division 293 tax purposes, she will be liable for an additional $3,750 in Division 293 tax on her super contribution (15% x $25,000).
This means the total tax paid on her $25,000 super contribution is $7,500 (30% x $25,000, which is made up of 15% taxed when it enters the super fund and an additional 15% Division 293 tax).
Calculating your Division 293 tax
The ATO calculates your Division 293 income and super contributions as follows:
1. Income for Division 293 tax purposes
The ATO uses your income tax return to determine your annual Division 293 income. This is based on the same income calculation used for the Medicare levy surcharge without reportable super contributions.
It includes your taxable income, total reportable fringe benefits and any after tax amounts for financial investment and rental property losses and family trust distributions.
2. Super contributions for Division 293 tax purposes
Super contributions counted for Division 293 tax purposes only include concessional (before-tax) contributions such as the SG contributions made by your employer, salary sacrifice payments and any personal contributions for which you claim a tax deduction.
If you are a member of a defined benefit super fund, it includes any defined benefit contributions.
Note: Any super contributions that are taxed because you have exceeded your concessional contributions cap are not counted in the Division 293 tax calculation as they have already been taxed.
Paying a Division 293 tax debt
Calculations for Division 293 tax are made by the ATO after you lodge your income tax return. It also uses information contained in the member contribution statements received from super funds and the annual return from your SMSF (if you are an SMSF member).
If you are required to pay any tax, you will receive an ‘Additional tax on concessional contributions (Division 293) notice’ from the ATO.
You can choose to pay a Division 293 tax bill either with your own money, or by electing to use your existing super account balance by completing a Division 293 tax liability form.
If you decide to pay a Division 293 tax bill from your SMSF account, the ATO will issue a release authority to the fund, which the fund trustee then returns to the ATO with the required payment.