• Category: Tax

Division 293 Tax Explained

For most Australian taxpayers, Division 293 tax is not ordinarily on their radar until they receive an unexpected tax bill at the end of the financial year.

And this is because it’s not a tax that gets factored into PAYG payments. In other words, it’s not something your employer withholds from your salary and pays to the Australian Tax Office (ATO). 

But, if you’re making additional concessional contributions to your superannuation fund, it’s something that you have to be aware of so that you’re not caught off guard when you lodge your tax return. 

So, here’s what you need to know about this form of tax, how it works, and how it’s calculated. 

Understanding Division 293 Tax

The Division 293 tax comes into play to lessen the tax benefits for higher income earners with a combined income and super contributions exceeding a certain threshold, known as the Division 293 threshold.

The threshold is currently set at $250,000. 

This aims to ensure that high-income earners pay the same amount of tax on their super contributions as average-income earners. The Australian Taxation Office achieves this by levying an extra 15% tax on these contributions, bringing the total tax rate to 30% for those earning above the threshold.

How Division 293 Tax is Calculated

The calculation of Division 293 tax is based on the lesser of your low-tax contributions (concessional contributions) and the amount by which your combined income and super contributions exceed the threshold.

Let’s break it down:

Calculate Your Combined Income

This is the sum of your taxable income, total reportable fringe benefits, total net investment loss, and low-tax super contributions, less any child support you paid.

Determine Your Low-Tax Contributions

These are generally the contributions made to your super fund that are taxed at the concessional rate of 15%. It includes your employer’s contributions (such as Super Guarantee contributions) and any salary sacrificed contributions you made.

If your combined income exceeds the $250,000 threshold, the amount by which it exceeds the threshold is compared with your low-tax contributions. The lesser of these two amounts is your Division 293 income.

The tax is then 15% of your Division 293 income.

You should note that the Division 293 tax is separate from the 15% tax that your super fund pays on concessional contributions. If you’re subject to Division 293 tax, the total on your concessional contributions could be up to 30%.

Division 293

Example

Meet Jane. She’s a successful architect, earning a taxable income of $220,000 in the 2022-23 financial year. 

In addition to her salary, Jane’s employer contributes $23,100 to her superannuation fund, and she makes a personal concessional contribution of $5,000. Jane has no reportable fringe benefits, total net investment losses, or child support payments.

Let’s calculate Jane’s Division 293 tax:

  • Calculate combined income: Jane’s combined income is her taxable income ($220,000) plus her low-tax super contributions ($23,100 from her employer and $5,000 she contributed, totalling $28,100). This gives Jane a combined income of $248,100.
  • Determine low-tax contributions: Jane’s low-tax contributions are the contributions made to her super fund that are taxed at the concessional rate of 15%. In Jane’s case, this is the $23,100 from her employer and the $5,000 she contributed, totalling $28,100.
  • Calculate Division 293 income: Jane’s combined income exceeds the $200,000 threshold by $48,100 ($248,100 – $200,000). This amount is compared with her low-tax contributions of $28,100. The lesser of these two amounts is her Division 293 income. So, Jane’s income is $28,100.
  • Calculate the Division 293 tax: The Division 293 tax is 15% of Jane’s Division 293 income. So, Jane’s Division 293 tax is 15% of $28,100, which equals $4,215.

So, in addition to the 15% tax that her super fund pays on her concessional contributions ($4,215), Jane will also need to pay a Division 293 tax of $4,215. This means the total tax on her concessional contributions for the 2022-23 financial year is $8,430, effectively a 30% tax rate.

Implications for High-Income Earners

This form of tax can have significant implications for high-income earners because it reduces the tax advantage of making concessional contributions to super, which could impact your retirement savings strategy.

If you’re a high-income earner, consider the impact of Division 293 tax when planning your super contributions. You may need to adjust your contributions or consider other tax-effective investment strategies.

Tax Returns

How to Pay Division 293 Tax

If you’re liable for Division 293 tax, the Australian Tax Office (ATO) will issue a Division 293 tax assessment – a detailed document providing comprehensive information about your tax situation. 

It will specify the amount of Division 293 tax you owe, the income year it relates to, and the due date for payment.

The ATO sends the Division 293 tax assessment to your myGov inbox if you have linked the ATO to your myGov account. Alternatively, it will be mailed to your postal address. 

Once you receive your assessment, you have two main options for payment: pay out of pocket or use a release authority.

Paying out of pocket means paying from your savings or current income. 

Alternatively, you can complete the release authority and instruct your super fund to pay the tax directly from your super account. This can be a convenient option if you need the funds to pay the tax out of pocket. 

Remember, however, that using super funds to pay the tax will reduce your retirement savings.

Key Takeaways

  • Division 293 tax is an additional 15% tax on concessional contributions if you exceed the $250,000 threshold.
  • The tax is levied on the lesser of your Division 293 super contributions and the amount you are more than the threshold.
  • You can pay Division 293 tax out of pocket or using your super fund balance.

Despite the additional tax, making other superannuation contributions can still be worthwhile for tax savings in the long term.

But suppose you’re unsure about any aspect of Division 293 tax, including whether it’s a worthwhile savings strategy. In that case, it’s always a good idea to seek advice from a tax professional or financial advisor.

If you need clarity on your tax situation or want to discuss your financial strategy, contact KNS Accountants and Business Advisors today. 

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