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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 find yourself paying extra tax on your concessional (before-tax) super contributions.
Under the Division 293 tax rules, if your income and concessional contributions total more than $250,000 in 2020/21, you may have to pay an additional 15% tax on some or all of your super contributions.
Division 293 tax is imposed on top of the normal 15% contributions tax paid on concessional contributions when they enter your super account.
Division 293 tax: What it means for high income earners
Division 293 tax is an extra charge imposed on some of the super contributions made by higher income earners to reduce the tax benefits they receive from the super system.
If your income plus any concessional (before-tax) super contributions totals 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 this threshold.
Need to know
Where your income excluding your concessional contributions is under the $250,000 threshold (in 2020/21), but your concessional contributions push you over the limit, the extra 15% tax is only applied to the concessional contributions exceeding the threshold.
Why do I have to pay Division 293 tax?
The extra 15% tax imposed under the Division 293 rules is applied because, as a high-income earner, your marginal tax rate for income amounts over $180,000 is 45% (in 2020/21). 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 your tax bill than someone earning between $37,001 and $90,000 (whose marginal tax rate is 32.5% in 2020/21).
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 closer to that paid by someone on an average income.
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 or receiving an eligible termination payment or salary bonus.
In these situations, the tax rate for your concessional contributions during that tax year increase if you exceed the threshold but drop back the following year when your income goes back under the Division 293 threshold.
Good to know: Background to Division 293
From 1 July 2017, the annual combined income and super contribution threshold for paying Division 293 tax was reduced to $250,000. Between 2012/13 and 2016/17, the threshold for paying Division 293 tax was $300,000.
The government claimed lowering the threshold for Division 293 tax 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. The threshold has not been indexed so in future years more Aussies will be paying the tax when their income increases.
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, disregarding any reportable super contributions.
The ATO’s income calculation is based on your:
- Taxable income
- Total reportable fringe benefits
- Any after-tax amounts for financial investment and rental property losses and family trust distributions
- Super lump sum taxed elements with zero tax rate
- Any assessable First Home Super Saver (FHSS) scheme released amounts. For more information, read SuperGuide article How does the First Home Super Saver (FHSS) Scheme work?.
2. Super contributions for Division 293 tax purposes
Super contributions counted for Division 293 tax purposes are your concessional (before-tax) contributions such as:
- SG contributions made by your employer
- Salary-sacrifice payments
- Personal contributions for which you claim a tax deduction
- Defined benefit contributions if you are a member of a defined benefit super fund.
Need to know
Different rules apply when calculating Division 293 tax if you are a member of a defined benefit fund. Where Division 293 tax relates to your benefit in a defined benefit fund, you don’t pay tax until a super benefit is paid to you from the fund.
The ATO, however, keeps a debt account for the amount of Division 293 tax you are yet to pay and interest is added to this amount for payment when you receive your super benefit. For more information, see the ATO website.
How does the Division 293 tax work?
You are only required to pay Division 293 tax if your income and concessional contributions for Division 293 purposes exceeds the annual threshold ($250,000 in 2020/21).
You will be liable for the extra tax on either your Division 293 super contributions, or the amount that is over the current threshold – whichever amount is lower.
Case study
In 2019/20, 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 super 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 ($315,000 + $25,000 = $340,000). So the amount over the $250,000 threshold is $90,000 ($340,000 – $250,000 = $90,000).
The ATO calculates the lesser amount of $25,000 for Ayumi for Division 293 purposes in 2019/20.
As Ayumi is over the $250,000 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 the normal 15% contributions tax when the money enters her super account and an additional 15% Division 293 tax).
Paying a Division 293 tax debt
Calculating any Division 293 tax you need to pay if you are a high-income earner is done by the ATO after you lodge your income tax return. It combines this information with data from the member contribution statements it receives 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 assessment notice from the ATO or a notice in your myGov inbox if you lodged your tax return using myTax.
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.
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