Division 293 tax is an additional tax aimed at reducing the superannuation tax concessions that high-income earners receive. Implemented by the Australian government, it ensures those with higher incomes pay a fairer share in taxes. The tax comes into play when an individual's combined income and super contributions exceed a set threshold, currently $250,000. This helps create a more balanced approach to retirement savings, ensuring that tax benefits are not skewed in favour of the wealthy.
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How Division 293 tax is calculated
To understand the Division 293 tax calculation, we first need to look at how Division 293 income is determined. This income is key to figuring out whether an individual is liable for this additional tax.
Taxable Income: This is the total income earned within a financial year, including salary, wages, and other sources.
Reportable Fringe Benefits: Perks provided by employers, like a company car or private health insurance, added to the taxable income.
Net Investment Losses: Losses from investments or rental properties deducted from the taxable income.
These components are then combined with concessional super contributions. If the total exceeds the $250,000 threshold, an additional 15% tax is applied to the excess contributions.
Understanding how Division 293 tax is calculated is crucial for high-income earners. Learn more about tax minimisation strategies to manage your super contributions effectively.
Division 293 tax assessment
Once the ATO (Australian Taxation Office) identifies that your income exceeds the threshold, they issue a Division 293 notice of assessment. This notice outlines the additional tax owed. Taxpayers can choose to pay this amount either out of pocket or by releasing funds from their super account using the Division 293 election form.
Who has to pay Division 293 tax?
High-income earners
The high income earners division is when your combined income (taxable income, reportable fringe benefits, and net investment losses) and concessional super contributions exceed $250,000, you're liable for this tax. The extra tax rate on the portion above the threshold is 15%.
Division 293 for defined benefit members
Defined benefit fund members are also subject to this tax. Their contributions are valued differently, using specific rules to calculate a notional amount to determine if they exceed the threshold. This ensures fairness across different super fund types.
Given the complexity of Division 293 tax, seeking personal financial advice can help high-income earners navigate their tax obligations more effectively.
Impact of Division 293 tax on super contributions
Concessional contributions: These are the pre-tax contributions made to your super fund, including employer and salary sacrifice contributions. Typically taxed at 15%, but if your income exceeds the Division 293 threshold, an additional 15% tax is applied, making it 30% in total. This reduces the tax benefits for high-income earners.
Taxable super contributions: By imposing the extra 15% tax, the amount left in your super fund decreases, impacting your overall super balance. For example:
In this scenario, an extra $4,500 in tax is owed on top of the regular contributions tax. Division 293 tax directly affects super contributions, potentially altering retirement savings. Effective retirement planning can help mitigate its impact.
Paying your Division 293 tax liability
When it's time to pay your Division 293 tax, you have two main options, each with its own set of advantages and implications:
Paying from personal funds
Using your own savings to pay the tax can help preserve your super balance, allowing it to continue growing over time. This option is particularly beneficial if you're aiming to maximise your retirement savings, as leaving your super intact can harness the power of compound growth. However, paying from personal funds requires an immediate financial outlay, which may impact your current cash flow or savings. It’s important to assess whether this upfront cost aligns with your overall financial strategy.
Releasing money from super
Alternatively, you can opt to pay the tax by releasing funds from your superannuation account. Division 293 super contributions avoid the need for an immediate out-of-pocket expense, easing short-term financial strain.
However, this option reduces your super balance, potentially affecting your retirement savings. The amount you withdraw not only reduces the principal amount in your super but also the future growth of these funds, which could impact your retirement lifestyle. If you opt to pay the tax using your super, you might need to consider SMSF accounting and compliance to manage this process effectively.
Choosing the right option depends on your financial situation, cash flow, and long-term goals. A careful evaluation of both options, possibly with the assistance of a financial advisor, can help you make an informed decision.
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Using the Div 293 election form
If you choose to pay the tax from your super:
Step 1: Receive the ATO notice of assessment.
Step 2: Complete the Division 293 election form online or via ATO services.
Step 3: Submit the form, and your super fund will release the required amount to the ATO.
Can you avoid Division 293 tax?
While avoiding Division 293 tax entirely is challenging, particularly for those consistently exceeding the income threshold, there are ways to manage and potentially minimise its impact:
Manage concessional contributions
One effective strategy is to adjust your salary sacrifice or other concessional contributions. By carefully planning these contributions, you can aim to stay below the $250,000 threshold. However, it's crucial to strike a balance—reducing contributions may lower your immediate tax liability but could also impact your long-term retirement savings.
Timing of income
Consider the timing of capital gains and other income events. Since taxable income plays a significant role in determining Division 293 Tax liability, strategically managing when you realise capital gains or receive other forms of income can help keep your taxable income below the threshold in a given financial year. For example, deferring certain income streams to a later financial year could potentially reduce your liability.
While these strategies can help manage the impact of Division 293 Tax, they can also affect your overall financial plan. Always consult a financial advisor to ensure these strategies are aligned with your long-term financial goals and retirement planning.
Is it better to pay Division 293 tax from super?
Impact on retirement savings
Using super to pay the tax reduces funds set aside for retirement, potentially impacting your future lifestyle. Paying from personal funds keeps your super intact but affects your current cash flow. Choosing to pay Division 293 tax from your super has long-term implications. Get tailored superannuation planning advice to decide what's best for you.
