Division 293 tax was introduced by the Australian government to reduce the tax benefits that high-income earners receive from their superannuation contributions.

Superannuation is typically taxed at a concessional rate of 15%, which is lower than most individuals' marginal tax rates. To ensure that high-income earners don’t receive disproportionately large tax concessions, the Division 293 tax was implemented.

If you are considered a high-income earner, Division 293 tax imposes an additional 15% tax on certain superannuation contributions, meaning that your effective tax rate on these contributions increases to 30%.

Who Does Division 293 Tax Apply To?

Division 293 tax applies to individuals whose combined income and concessional superannuation contributions exceed $250,000 in a financial year.

It’s important to understand what “combined income” includes. The Australian Taxation Office (ATO) calculates your Division 293 income by considering:

• Taxable income - Your income from employment, business activities, investments, etc.
• Fringe benefits - Any reportable fringe benefits you may receive.
• Net investment losses - Negative gearing from investment properties or other investments.
• Concessional super contributions - These include both employer superannuation contributions (such as compulsory Superannuation Guarantee contributions) and any personal concessional (before-tax) contributions you make.

If your combined income is over the $250,000 threshold, you may be liable for Division 293 tax on some or all of your concessional super contributions.

How is the Division 293 Tax Calculated?

The amount of Division 293 tax you owe is calculated based on how the combined amount of your concessional super contributions and your income (as calculated above) exceeds the $250,000 threshold.

There are two possible scenarios for how this tax is applied:

1. If your income without including concessional super contributions is below $250,000, but including super contributions pushes you over the threshold, Division 293 tax is only applied to the amount of concessional contributions that exceed $250,000.
2. If your income before taking into account the concessional contributions is already over $250,000, the tax is applied to all of your concessional contributions, up to the concessional contributions cap (currently $30,000 per year).

Here’s a simple example:

Suppose your total income (including fringe benefits and investment losses) is $240,000, and your concessional super contributions are $15,000.

In this case, your total combined income is $255,000. Division 293 tax will only apply to the $5,000 that exceeds the $250,000 threshold, not the full $15,000 of super contributions.

If your total income was $255,000, the Division 293 tax would be payable on the full $15,000 of the superannuation contributions.

When and How is Division 293 Tax Paid?

Once the ATO determines that you owe Division 293 tax, they will send you an assessment notice. You have the option to pay the tax directly or use your superannuation to cover the payment.

• Paying directly - You can choose to pay the tax using your personal funds, which will leave your super balance untouched.
• Using your super to pay - If you prefer, you can elect to have the tax paid from your superannuation fund. In this case, you will need to complete a Division 293 tax release authority form, allowing your super fund to withdraw the amount needed to pay the tax.

It’s important to act promptly when you receive an assessment from the ATO, as penalties can apply for late payments.

Strategies to Minimise Division 293 Tax

While Division 293 tax is unavoidable for many high-income earners, there are a few strategies that can help manage its impact:

• Salary packaging - Review your salary package and structure your income in ways that may reduce your Division 293 liability. For instance, salary sacrificing to superannuation or restructuring bonuses might help you stay under the $250,000 threshold.
• Personal deductible contributions - While making additional concessional contributions can reduce your taxable income, it may also increase your exposure to Division 293 tax. You should work with your accountant or financial advisor to find the right balance.
• Non-concessional contributions - If you want to boost your super but are concerned about Division 293 tax, consider making non-concessional (after-tax) contributions instead. These are not subject to concessional contribution limits or Division 293 tax.

Division 293 tax is a critical consideration for high-income earners in Australia, adding an extra layer of complexity to managing superannuation contributions.

If your combined income exceeds the $250,000 threshold, it’s important to review your super contributions and overall tax planning strategy to ensure you’re minimising the impact of this additional tax.

Make an appointment with us to discuss your specific circumstances.