Superannuation in Australia offers significant tax advantages, designed to help citizens build their retirement nest eggs. However, not all Australians receive these benefits equally. For high-income earners, the Australian Taxation Office (ATO) implemented the Division 293 tax to ensure a more equitable distribution of super tax concessions.
If you’re earning above certain thresholds, understanding this additional tax is crucial for effective financial planning. This guide explains what Div 293 tax is, who it affects, and how to manage it.
What is Division 293 Tax?
Named after its section in tax legislation, Division 293 tax is an extra 15% tax on certain superannuation contributions, specifically targeting individuals whose income and concessional contributions exceed $250,000 in a financial year.
The purpose is to reduce the tax advantage that higher-income earners receive on their super contributions, aligning their tax benefits more closely with those of average-income earners.
Typically, when concessional contributions enter your super fund, they’re subject to a 15% tax rate. This rate is significantly lower than the marginal tax rates paid by high-income earners, which can be up to 45% plus the Medicare levy. Division 293 tax adds an additional 15% tax on these contributions for high-income earners, bringing the total tax to 30%.
Who is Affected by Division 293 Tax?
If your total income, when combined with your pre-tax super contributions, surpasses the $250,000 annual threshold, you may be subject to the Division 293 Tax.
For Div 293 tax, your income includes:
- Taxable income
- Reportable fringe benefits
- Total net investment losses
- Tax-free government pensions or benefits
- Concessional superannuation contributions
It’s important to note that the threshold has changed over time. From July 2012 to June 2017, the Division 293 tax threshold was $300,000. Since July 2017, it has been reduced to $250,000, affecting more high-income earners.
How Division 293 Tax is Calculated
The calculation of the Div 293 tax might seem complex, but it follows a straightforward principle. It’s essentially 15% of the lesser of:
- The amount by which your income plus concessional contributions exceeds the $250,000 threshold, or
- Your concessional contributions.
Example 1:
Selena has a taxable income of $230,000, and her employer contributes $25,000 to her super fund.
- Combined amount: $255,000 (exceeds the threshold by $5,000)
- Division 293 tax payable: 15% of $5,000 = $750
Example 2:
Michael has a taxable income of $300,000 and receives employer super contributions of $27,500.
- Combined amount: $327,500 (exceeds the threshold by $77,500)
- Div 293 tax payable: 15% of $27,500 = $4,125 (as this is less than 15% of $77,500)
How You’ll Know If You’re Liable for Division 293 Tax
The ATO assesses your liability for Division 293 tax after you lodge your income tax return. If you’re liable, you’ll receive a Division 293 tax assessment notice from the ATO, usually a few months after your tax return is processed.
This assessment will detail:
- How the tax has been calculated
- The amount payable
- Payment options available to you
Payment Options for Division 293 Tax
When you receive a Div 293 tax assessment, you have two main payment options:
- Pay from your own money: You can pay the tax directly to the ATO from your personal funds.
- Pay from your super fund: You can request the ATO to issue a release authority to your super fund, allowing the fund to pay the tax on your behalf. This reduces your retirement savings but doesn’t impact your current cash flow.
If you choose to pay from your super fund, the payment is treated as a benefit payment from your super and isn’t subject to additional tax.
Strategies to Manage Division 293 Tax
While Division 293 tax is unavoidable for high-income earners, there are strategies to manage its impact:
- Contribution timing: If your income fluctuates year to year, consider making larger concessional contributions in years when your income is lower.
- Spouse contributions: Consider splitting the contribution with a lower-income spouse who isn’t subject to Div 293 tax.
- Non-concessional contributions: These aren’t subject to Division 293 tax, though they don’t provide an upfront tax deduction.
- Salary sacrifice planning: Carefully plan salary sacrifice arrangements to optimise tax outcomes while considering the Division 293 tax implications.
Remember that despite the additional tax, concessional super contributions often remain tax-effective for high-income earners compared to receiving the same amount as salary.
Common Questions About Division 293 Tax
Here are common questions about Division 293 tax in Australia, along with concise answers:
How to avoid Division 293 tax in Australia?
Division 293 tax is generally unavoidable if your income surpasses the designated threshold. However, you can manage it by timing contributions during lower-income years, splitting with a spouse, or using non-concessional contributions instead.
Is it better to pay Div 293 from superannuation?
Paying Division 293 tax from your super fund preserves your current cash flow but reduces your retirement savings. The better option depends on your circumstances, including your cash position and long-term retirement goals.
Who is exempt from Div 293 tax?
Anyone with a combined income and concessional contributions below $250,000 is exempt from Div 293 tax. Additionally, Commonwealth judges and certain state higher judicial officers have specific exemption arrangements due to constitutional constraints.
Is Division 293 tax deductible?
No, the Division 293 tax is not tax-deductible.
Is it worth claiming a tax deduction on super contributions?
For most people, including those affected by Division 293 tax, claiming a tax deduction on super contributions remains worthwhile. Even with the additional 15% tax, high-income earners still benefit from a 15% tax advantage compared to their marginal tax rate.
Final Thoughts
Understanding Div 293 Tax: How It Affects High-Income Super Contributions. If you’re potentially affected by this tax, consider seeking professional financial advice tailored to your specific circumstances.
