High-income earners: Division 293 tax
Written and accurate as at: Nov 15, 2021 Current Stats & Facts
When looking at super contributions, a concessional contribution refers to a contribution that can be claimed as a tax deduction by the contributor. This can encompass mandatory (including Super Guarantee) and voluntary (including salary sacrifice) employer contributions, as well as personal deductible contributions.
Importantly, the amount of concessional contributions is reduced by a contributions tax of 15%*.
*Individuals with adjusted taxable income of $37,000 or less, may be eligible to receive the low-income super tax offset (up to $500).
However, individuals with income and concessional contributions totalling more than $250,000, may have to pay an additional 15% tax (Division 293 tax) on some or all of their low-tax contributions.
Please note: Low-tax contributions refer to concessional contributions, such as the abovementioned (eg Super Guarantee, salary sacrifice and personal deductible contributions). Low-tax contributions don’t include excess concessional contributions (those above an individual’s concessional contributions cap), so excess concessional contributions won’t attract Division 293 tax. For the 2021-22 financial year, the concessional contributions cap is $27,500. However, depending on an individual’s circumstances, the carry-forward provision can affect this amount—effectively increasing it.
Division 293 tax: The income threshold and definition
For the 2021-22 financial year, the income threshold for Division 293 tax is $250,000.
Of note, from 1 July 2017, the income threshold in a financial year has been set at $250,000, whereas prior to this date (from 1 July 2012 to 30 June 2017) the income threshold in a financial year was set at $300,000.
In terms of income, this includes an individual’s taxable income (which will include any excess concessional contributions), reportable fringe benefits, net investment losses, net family trust distributions for which tax has been paid, and low-tax contributions. Any super lump sums accessed through the First Home Saver Scheme (FHSSS) and within the low-rate cap (applicable between preservation age and age 60), are excluded.
However, despite these exclusions, the income definition remains quite broad. As such, one-off events (eg selling an asset and realising a capital gain, or receiving a redundancy or termination payment), may see an individual deemed liable to pay Division 293 tax when ordinarily this would not be the case.
Division 293 tax: The calculation and payment of tax
Calculation of an individual’s liability for Division 293 tax resides with the ATO.
The ATO uses information included in an individual’s tax return, as well as their super fund’s contribution reporting. Importantly, upon assessment of this information, if the ATO deems an individual to be liable, then they issue the individual with an ‘Additional tax on concessional contributions (Division 293) notice’.
At this point in time, the individual has two options to pay the tax by the stipulated due date on the notice:
- Make a payment directly to the ATO; or
- Make an election to release the funds from super to pay the tax (Please note: an individual must make this election within 60 days of the date of their assessment).
In terms of the amount of tax payable, if an individual is deemed to have income and low-tax contributions totalling more than $250,000, the additional 15% tax will apply to the lesser of the following two amounts:
- The amount by which the individual’s income and low-tax contributions exceed $250,000; or
- The total of the individual’s low-tax contributions.
Division 293 tax: The building of super wealth moving forward
When considering concessional contributions and the contributions tax payable on them, please note, the contributions tax of 15% can often be lower than an individual’s marginal tax rate. See below.
|
Individual resident tax rates (2021-22 financial year) |
||
|
Taxable Income |
Marginal tax rate* |
Tax payable |
|
$0 – $18,200 |
Nil |
Nil |
|
$18,201 – $45,000 |
19% |
Nil + 19% on each $1 over $18,200 |
|
$45,001 – $120,000 |
32.5% |
$5,092 + 32.5% on each $1 over $45,000 |
|
$120,001 – $180,000 |
37% |
$29,467 + 37% on each $1 over $120,000 |
|
$180,001 + |
45% |
$51,667 + 45% on each $1 over $180,000 |
*The 2% Medicare levy may be in addition to this rate.
Depending on an individual’s circumstances, this can also be the case with the additional 15% tax (Division 293 tax). For example, while the Division 293 tax can effectively increase the tax on some or all of an individual’s concessional contributions to 30%, the current top marginal tax rate is 47% (including Medicare Levy).
Therefore, in both scenarios, it could still be worthwhile for an individual to consider contributing to super via concessional contributions, such as salary sacrifice and personal deductible contributions.
On this point, the Government’s Retirement Income Review*, highlighted that our super—and subsequent retirement income (and outcome)—can be boosted by, among other things, increasing our super contributions.
Lastly, with all discussed above, it’s key to note that special rules can apply for defined benefit funds, state higher level office holders, commonwealth judges and justices, and temporary residents departing Australia.
If you have any queries about this article, please contact us.
*Australian Government, Treasury. (2020). Retirement Income Review: Final report, July 2020.