Division 293 Tax

Have you recently received an unexpected notice from the Australian Taxation Office (ATO) regarding Division 293 tax? If so, you might be wondering why you’re being asked to pay more taxes. It can be perplexing, especially if you had thought that making additional contributions to your superannuation would result in tax benefits rather than additional liabilities. It may even be puzzling if you haven’t made any extra contributions but received a Division 293 notice.

In this article, we will unravel the concept of High-Income Superannuation Tax and shed light on its significance. We’ll explore what this tax entails, how it’s calculated, and, most importantly, how you can navigate it smartly to avoid unnecessary tax burdens.

Whether you’re a high-income earner or seeking to optimize your super contributions, let’s discover how to manage Division 293 tax wisely.

What is Division 293 Tax?

Division 293 Tax is an extra tax imposed on high-income individuals in Australia who earn more than $250,000 annually and have low-tax contributions to their superannuation fund. It was introduced in 2013 to reduce the tax advantage that high-income earners receive on their concessional contributions.

Essentially, the 293 Tax ensures that high-income earners contribute a fairer share of taxes on their super contributions. The standard concessional tax rate for super contributions is 15%, encouraging individuals to save for retirement.

How To Calculate Tax Under Division 293

If your annual adjusted taxable income, combined with your Division 293 super contributions, reaches or surpasses $250,000, you will be liable to pay Division 293 tax. This tax is calculated at a fixed rate of 15% and applies to the lower of two amounts:

• the concessional contributions received by your superannuation fund during the financial year or
• the excess concessional contributions that exceed the $250,000 threshold.The primary aim of this tax is to address the disparity in tax advantages enjoyed by high-income earners in relation to their super contributions, ensuring a more equitable taxation system overall.

1. Example 1

• Adjusted Taxable Income: $320,000
• Concessional Contributions: $30,000
• Division 293 Threshold: $250,000

Calculation: As the sum of Adjusted Taxable Income and Concessional Contributions ($350,000) is over the Division 293 threshold of $250,000, the tax is calculated on the full amount of Concessional Contributions.

Tax: $30,000 * 15% = $4,500

2. Example 2

• Adjusted Taxable Income: $210,000
• Concessional Contributions: $25,000
• Division 293 Threshold: $250,000

Calculation: Since the sum of Adjusted Taxable Income and Concessional Contributions ($235,000) is below the Division 293 threshold of $250,000, no tax is applicable.

Tax: $0

3. Example 3

• Adjusted Taxable Income: $240,000
• Concessional Contributions: $45,000
• Division 293 Threshold: $250,000

Calculation: Since the sum of Adjusted Taxable Income and Concessional Contributions ($285,000) is over the Division 293 threshold of $250,000, the tax is calculated on the lower of either the amount over the threshold or the total contributions, which is $35,000.

Tax: $35,000 * 15% = $5,250

What Does Income Include for Tax Under Division 293?

When assessing your liability for the 293 Tax, it’s essential to understand the components that contribute to your overall income. It’s not solely based on your taxable income; several other factors are considered. Here’s a breakdown of what constitutes your income for tax purposes:

1. Taxable income: This refers to the income on which you are obligated to pay taxes. It includes your assessable income, which encompasses various sources of earnings, reduced by any eligible deductions you can claim.

2. Total reportable fringe benefits: If you receive fringe benefits as part of your employment, they are considered when determining your income for Division 293 Tax. These benefits, such as company cars, private health insurance, or housing allowances, are factored into the calculation.

3. Net financial investment losses: If you have incurred losses from financial investments like stocks, shares, or rental properties, these losses are considered in assessing your income for the 293 Tax. They are considered to provide a comprehensive picture of your financial situation.

4. Net rental property losses: If you own rental properties and have experienced losses from those properties, those losses are also included in determining your income for tax purposes. It ensures that any negative impact from rental investments is considered.

5. Amounts on which family trust distribution tax has been paid: If you have received distributions from a family trust and tax has already been paid on those distributions, these amounts are accounted for in your income for 293 Tax purposes. It prevents double taxation and ensures fair treatment of distributed income.

Also, remember that if you have received lump sum super benefits that have already been taxed at a rate of zero, they will not be considered part of your income for the 293 Tax.

Considering these factors enables a thorough and precise evaluation of your income. This inclusive approach ensures fairness in determining your tax liability by considering different income sources. It also encourages individuals with higher incomes to contribute appropriately towards their superannuation funds, promoting equity in the system.

What Are Concessional Contributions?

Concessional contributions refer to specific payments made into your superannuation fund that receive favorable tax treatment. Let’s explore what constitutes concessional contributions:

• Employer contributions: These are the contributions made by your employer to your accumulation fund as part of your employment benefits.
• Salary sacrifice contributions: These are voluntary contributions you make, where you choose to sacrifice a portion of your salary and divert it into your superannuation fund.
• Notional employer contributions: These contributions are specific to defined benefit funds, where an employer makes contributions on behalf of employees based on a predetermined formula.

These contributions form part of your income and are considered when determining your tax liability under Division 293 Tax.

Additional Points To Consider

Some additional points you must know related to 293 Tax Division are:

1. If your income, excluding the contributions you make to your superannuation fund, is below the $250,000 threshold, but your contributions push your total income over the threshold, you will only pay Division 293 tax on the excess contributions. This means that you’ll be taxed only on the portion of contributions that goes beyond the threshold amount.

2. The ATO calculates the Division tax yearly. This means that your liability for this tax can vary from year to year. For instance, you may be subject to this tax in certain years, while in others, you may not have any tax liability under this provision. This could occur, for example, if you experience a substantial capital gain in one particular year, leading to a higher income that triggers the Division tax.

Understanding Division 293 Tax: Why Do You Have to Pay?

As a high-income earner, you may wonder why you must pay the tax under Division 293. It’s because your marginal tax rate for income over $180,000 is 45%, while the tax rate on your super contributions is only 15%. This means you get a bigger tax break on your super contributions compared to people earning between $45,001 and $120,000.

To make things fairer, the 293 tax adds an extra 15% tax on higher income earners. This brings their tax savings on super contributions closer to what someone with an average income would pay. It ensures that everyone contributes their fair share based on their income level.

Thus, the Division 293 Tax serves as a means to bridge the gap between the tax concessions received by high-income earners and the average income earners, ensuring a fairer distribution of benefits and a more balanced taxation system.

Unfortunately, even if your income exceeds the $250,000 threshold due to one-off events, 293 Division tax still applies. However, the tax rate on your super contributions goes back to normal the following year when your income falls below the Division 293 threshold.

What Are One-Off Events?

While your income may not typically exceed the Division 293 threshold, certain events can temporarily raise your income above this level for a specific year. These events may include:

• You receive a termination payment eligible for tax.
• You realize capital gain.
• Your income significantly rises due to other reasons.
• You allocate a portion of your income to super through salary sacrifice.

During such instances, your marginal tax rate for the year rises, increasing the concession received on your concessional contributions. To ensure fairness and balance, the 293 tax may be assessed to reduce this concession to an equitable level.

How to Determine If You Need to Pay Division 293 Tax?

To ascertain whether you must pay Division 293 tax, the Australian Taxation Office (ATO) will examine the information in your tax return and data received from your superannuation fund. Understanding your obligations is crucial if you believe or are aware that your income exceeds the tax threshold.

Receiving a Notice of Assessment

Once the ATO receives your income and contribution information, they will issue a notice of assessment. If you use myTax to lodge your tax return, the notice will be sent to your myGov Inbox. However, if you prefer your registered tax agent to receive it, you must request them to update your communication preferences.

If the ATO determines that you are liable to pay Division 293 tax, the notice of assessment will specify the amount due. Complying with the ATO’s requirements and providing accurate information regarding your income and superannuation contributions is essential. Doing so can ensure a smooth process and avoid any potential penalties or non-compliance issues.

What to Do Once You Receive the Notice?

Once you receive the notice regarding your high-income superannuation tax, you must take proactive steps to ensure a smooth resolution. Follow these recommended actions to manage the situation effectively:

1. Thoroughly Review the Notice

Take the time to carefully read the letter and ensure that the taxable income used for calculating the tax is accurate. Pay close attention to the details provided to ensure clarity and understanding.

2. Verify Superannuation Contributions

Double-check the superannuation contributions included in the 293 Tax calculation. Ensure the information aligns with your records and is accurately reflected in the notice.

3. Seek Professional Guidance

If you have any uncertainties or concerns about any aspect of the letter or believe that the taxable income used for the calculation is incorrect, it is advisable to seek professional advice. Consulting with a knowledgeable tax expert can provide valuable insights and guidance tailored to your specific circumstances.

4. Request a Review, if Needed

If you are dissatisfied with the ATO’s decision, you can request a review. This allows you to present your case and provide additional information or evidence that may influence the outcome. Following the ATO’s procedures and guidelines for requesting a review is important.

5. Timely Payment of Tax Liability

To avoid potential penalties and interest charges, it is crucial to pay the tax liability on time. Ensure that you adhere to the specified deadline and make the necessary arrangements to settle the payment promptly.

By taking these proactive measures, you can effectively address the tax notice and work towards a satisfactory resolution. 

What Are the Payment Options?

When settling your Division 293 Tax liability, you must be aware of the available payment options. Here are the two choices for high-income earners:

1. Payment from Personal Bank Account

One option is to make the payment directly from your personal bank account. This involves using your funds to cover the tax liability. You should have the necessary funds available and follow the designated payment process to complete the transaction.

2. Superannuation Fund Release

Alternatively, you can release money from your superannuation fund to cover the tax liability. To proceed with this option, you must complete a Division 293 election form. This form allows the release of funds from your superannuation account specifically for paying the tax.

It’s important to note that the election form is valid for a limited period of 60 days. Beyond the 60-day window, the payment can only be made using personal funds.

With these payment options and adhering to the necessary procedures, you can effectively manage your 293 Division Tax liability. Consider your financial circumstances and choose the best payment method with your needs and preferences.