- What is Division 293 Tax?
- Why is there Division 293 Tax?
- Working out your Division 293 Tax amount
- How does Division 293 Tax work?
- Practical Examples
- How will I know if I need to pay Division 293 Tax?
What is Division 293 Tax?
Division 293 tax is designed to reduce the benefit high-income earners get on certain contributions made to their superannuation fund. Those individuals whose income and concessional contributions equal over $250,000 in a financial year (using an adjusted income calculation) are required to pay Division 293 tax, which is an additional 15% tax on some or all of your super contributions.
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 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.
Why is there Division 293 Tax?
To understand the reasoning behind its implementation better, let’s look at individual income tax rates which 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 higher than $180,000. Given the superannuation contributions tax rate is a flat 15% it means that high-income earners who are able to direct additional money into superannuation, instead of keeping it as income, pay contributions tax at 15% instead of 45% and effectively receive a 30% tax concession.
In contrast, a person earning between $45,001 and $120,000 is taxed at a rate of 32.5%, so after the 15% superannuation tax, 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 tax.
Working out your Division 293 Tax amount
The ATO calculates your Division 293 income by including all income streams and benefits received by an individual. The adjusted income calculation broadly includes:
- Taxable income
- Reportable fringe benefits
- Total net investment losses (includes both net financial investment loss and net rental property loss)
- Any assessable First Home Super Saver (FHSS) Scheme released amounts.
The Division 293 super contributions counted for tax purposes are concessional (before-tax) contributions which includes:
- Compulsory superannuation guarantee contributions made by your employer
- Salary-sacrifice super contributions
- Personal super contributions where you claim a tax deduction in your income tax return
- Defined benefit contributions if you are a member of a defined benefit super fund.
NOTE: From 1 July 2021, the annual cap for concessional contributions into super is $27,500, up from $25,000 in 2020–21.
Division 293 is not levied on non-concessional super 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.
How does Division 293 Tax work?
You are only required to pay Division 293 tax if your adjusted income and concessional contributions combined exceed $250,000 in the 2021-22 financial year. If this is the case you are liable for of 15% on the portion of concessional super contributions above this threshold.
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 of 30% is seen by the government as being fairer.
If an individual has a taxable income of $260,000 and concessional contributions of $27,500 then under the adjusted income calculation the two are added together to get to $287,500. This is over the $250,000 threshold by $37,500 ($287,500 - $250,000), yet Division 293 tax is calculated on the $27,500 in concessional super contributions which comes to $4,125.
If the same individual only had a taxable income of $240,000 with $27,500 in concessional contributions, totalling $267,500, they are still $17,500 above the $250,000 threshold ($267,500 - $250,000). They would therefore pay Division 293 Tax on $17,500 which comes to $2,625.
Example with capital gains
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 $2,625 in Division 293 Tax.
Example with tax losses
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 $27,500 then their adjusted income would be $262,500. This again is over the $250,000 threshold meaning an additional 15% tax would be incurred on $12,500 of the $27,500 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. 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 the tax to be released from your superannuation account.