What is Division 293 Tax?
Division 293 Tax is levied on individuals ‘fortunate’ enough to be earning $250,000 a year (using an adjusted income calculation) and is designed to reduce the benefit high-income earners get on certain contributions made to their superannuation fund. Note that prior to 1 July 2017 the relevant threshold was $300,000.
The superannuation tax rate of 15% is after all a concessional rate designed to encourage Australians to provide for their own retirement. The introduction of Division 293 Tax effectively brings in a form of scaling or ‘brackets’ into the tax payable on superannuation contributions.
If we look at personal income tax, individual income tax rates increase per a sliding scale under the marginal tax rates system. This scale starts at 0% for those individuals with a taxable income up to $18,200 and reaches 45% for individuals with a taxable income more than $180,000. Given the superannuation contributions tax rate is a flat 15% it means that high-income earners who are able to direct money into superannuation, instead of keeping it in their own name, pay contributions tax at 15% instead of 45% and effectively receive a 30% tax concession.
In contrast, a person earning more than $37,000 is taxed at a rate of 32.5%, so after the 15% superannuation tax, would receive a lower tax concession of only 17.5%.
This disparity in concession available was thought to unfairly advantage high income earners, hence the introduction of Division 293.
So how does it work?
As mentioned already Division 293 Tax only applies to high-income earners who earn more than $250,000 in a financial year (using an adjusted income calculation). It is a tax hit of an extra 15% on all or some of the concessional contributions made within that financial year.
The extra 15% Division 293 tax is essentially a ‘top up’ tax because an individual’s superannuation fund itself already pays 15% tax on any concessional contributions. This total tax impost of 30% is seen by the government as being fairer.
Importantly the adjusted income calculation broadly includes adding taxable income, reportable fringe benefits, total net investment losses (includes both net financial investment loss and net rental property loss) and concessional contributions.
As discussed in earlier blogs concessional contributions include compulsory employer contributions, salary-sacrifice contributions, and personal contributions made by an individual who has claimed the amount as a deduction in their income tax return. Division 293 is not levied on non-concessional contributions which are amounts paid by an individual out of their post-tax earnings into their superannuation fund for which they have not claimed a tax deduction.
Division 293 Tax is payable on the portion of concessional contributions above the relevant threshold of $250,000.
So if an individual has a taxable income of $260,000 and concessional contributions of $25,000 then under the adjusted income calculation the two are added together to get to $285,000. This is over the $250,000 threshold and thus an extra 15% tax would be charged on the contributions amount of $25,000 being $3,750.
Importantly if the same individual only had a taxable income of $240,000 they would still be subject to $2,250 in Division 293 Tax as they are still $15,000 above the $250,000 threshold ($240,000 taxable income + $25,000 concessional contributions).
It’s important to keep in mind that one-off events like capital gains can unfortunately bring Division 293 into the picture as well.
For example the taxable income figure above of $240,000 could be composed of $140,000 wages and a $100,000 capital gain (on a rental property for example) and the individual would still be subject to $2,250 in Division 293 Tax.
As with other income threshold calculations (eg. medicare levy surcharge, HELP debt repayments) it is also important to keep in mind tax losses made on investments like rental properties and share portfolios.
For example if an individual has a taxable income of $200,000 but had a negatively geared property incurring a loss of $20,000 and a share portfolio loss of $15,000 (as a result of associated borrowings) and concessional contributions of $25,000 then their adjusted income would be $260,000. This again is over the $250,000 threshold meaning an additional 15% tax would be incurred on $10,000 of the $25,000 contributions.
How will I know if I need to pay Division 293 Tax?
Once an individual has lodged their personal tax return and the ATO has concessional contribution information from any superannuation funds the individual may have, the ATO will make an assessment as to whether any Division 293 Tax is payable. A notice will be sent to the individual generally requiring payment within 21 days. The amount can be paid personally or an option can be taken to have the amount of tax released from their superannuation account.
Do your have questions about Division 293 Tax and how structuring can affect it? Get in touch with our team at BLG Business Advisers online or by calling (02) 4229 2211 to arrange an appointment today.