Division 293 Tax for High Income Earners & Super Contributions

What is Division 293 Tax?

Simply put, Division 293 tax is an additional tax that high-income earners are liable to pay to the ATO, designed to reduce the benefit high income earners receive on taxable contributions made to their superannuation fund.

The superannuation tax rate of 15% is a concessional rate designed to encourage Australians to provide for their own retirement. The introduction of Division 293 tax removes the larger tax savings high income earners receive and more closely aligns with the concessions received by average income earners by imposing an additional tax of 15% on contributions.

If your adjusted taxable income for a year plus your Division 293 super contributions equal or exceeds $250,000, Division 293 tax is calculated at 15% of the lower of:

• Concessional Contributions received by your fund during the financial year or;
• Amount of Concessional Contributions above the $250,000 threshold.

How do I know if I am a High-Income Earner?

While you may not consider yourself a ‘High-Income Earner’, the ATO will classify you individually as a high-income earner if for any given financial year, your Division 293 income is $250,000 or more. The ATO utilises the ‘Adjusted Taxable Income’ calculation to determine your Division 293 income for a given financial year.

Although there are a number of items incorporated within the adjusted taxable income calculation, a very basic way to determine if there’s a possibility you’ll exceed the Division 293 income threshold of $250,000, is to add your Taxable Income and Personal/Reportable Concessional Contributions together for a financial year.

It’s important to note that this calculation is computed every financial year by the ATO. As such, it’s possible that you’ll be liable for Division 293 in some years and not others (for example, if you make a significant capital gain in one year).

The reason behind Division 293 Tax

Why does the ATO want to reduce the benefit high-income earners receive? This is a brilliant question.

There is a clear disparity in tax concessions available between high-income earners and average income earners, when it comes to concessional superannuation contributions. This was thought to unfairly advantage high-income earners. So to minimise this the ATO introduced Division 293 tax which removes the larger tax savings high income earners receive.

To provide a clearer picture, firstly, it’s key to understand that Australia utilises a marginal tax rate system for individuals. Meaning, the rate of tax you pay is determined by your taxable income for a given financial year. We start at a tax rate of 0% for individuals with a taxable income below $18,200. The rates scale up and reaches 47.0% (Including Medicare Levy) for individuals with a taxable income higher than $180,000.

Secondly, the concessional tax rate for complying superannuation funds is 15%. The purpose of this concessional rate is to encourage Australians to put aside savings to fund their retirement, which in turn reduces the Age Pension burden on the Australian Government.

Case Study 1

Garry Has A Marginal Tax Rate of 47.0% & Has A Salary Sacrifice Arrangement With His Employer

The amount Garry’s employer has remitted to his superannuation fund as per their salary sacrifice agreement is taxed at the concessional rate of 15%. However, if this arrangement was not in place and the same amount was instead paid as ordinary salary and wages to Garry, he would pay tax on this amount at 47.0%. Effectively, this is a tax concession received of 32.0%

Case Study 2

Shelly Has A Marginal Tax Rate of 32.5% & Has A Salary Sacrifice Arrangement With Her Employer

While Shelly still has a salary sacrifice agreement with her employer, and these amounts are still taxed concessionally at 15% in her superannuation fund, the notional tax concession received for Shelly is only 17.5%.

Accordingly, the additional Division 293 tax imposed by the ATO on high-income earners is essentially a ‘top up’ tax. The aim is to bridge the gap between the concessions high-income earners are entitled to and what average income earners receive on similar arrangements.

It’s important to note that Division 293 is not levied on non-concessional super contributions (amounts paid into your superannuation fund utilising post-tax earnings).

Division 293 Tax Calculation Examples

Example 1:

• Individual has an Adjusted Taxable Income of $300,000 in the 2023 FY
• Concessional superannuation contributions of $27,500 were received by their fund in the 2023 FY

As the sum of these amounts ($327,500) is over the Division 293 threshold of $250,000 by more than their concessional contributions (Excess of $77,500 and Concessional Contributions were only $27,500), Division 293 tax is calculated on the full amount of concessional contributions.

Division 293 Tax: $27,500 * 15% = $4,125

Example 2:

• Individual has an Adjusted Taxable Income of $240,000 in the 2023 FY
• Concessional superannuation contributions of $27,500 were received by their fund in the 2023 FY

The sum of these amounts ($267,500) is over the Division 293 threshold of $250,000, but only by $17,500. As Division 293 tax is calculated on the lower of either the amount over the threshold or your total contributions, we would be calculating Division 293 tax on $17,500

Division 293 Tax: $17,500 * 15% = $2,625

How will I know if I need to pay Division 293 Tax?

BLG Business Advisers will be able to advise you of any potential Division 293 liabilities before assessments are issued by the ATO.

Once your individual tax return has been lodged and the ATO has received concessional contribution information from any superannuation funds you may have, the ATO will make an assessment as to whether any Division 293 Tax is payable.

A notice will be sent to you from the ATO explaining their calculations and advising you of the due date for your liability.

Please be aware that there are two options for payment of the Division 293 Tax. You can either:

• Pay directly from a personal bank account, or
• Complete a nomination form to allow money to be released from your superannuation account to fund the liability

If you have questions about Division 293 Tax and how this may affect you this is the time to ask. Our team at BLG Business Advisers are Wollongong Accountants who service all around Australia and are here to assist you, so please set up a time to talk with us.