Avoid paying extra tax in super
High income earners should plan ahead for their Div 293 liabilities.
Division 293 is a tax on concessional contributions for high-income earners. This tax can materially impact the net benefit of concessional contributions in your superannuation and how much tax you pay. For investors who are already diligent about salary sacrifice and concessional caps, understanding how Division 293 works is important to avoiding unwelcome surprises.
Division 293
Division 293 tax is an additional 15% tax on top of the standard tax imposed on concessional super contributions. It applies to individuals whose income and concessional contributions exceed the statutory threshold of $250,000.
If you are earning enough and making material super contributions, the tax concession that you enjoy on before-tax super contributions is reduced. The effective tax rate on those contributions becomes 30% instead of 15%.
How it works
From the 2017-2018 Financial Year onwards, the threshold was set at $250,000 and is not indexed.
Your $250,000 threshold includes:
Income + concessional contributions = <$250,000, you are liable for Division 293.
If you are liable for the tax, it is paid on the lesser of:
- Your total concessional contributions for the year; or
- The amount by which your income and concessional contributions exceed $250,000.
The additional tax rate of 15% (total 30%) applies only to this taxable amount.
For example, you earn $240,000 and your concessional super contributions are $30,000. The total is $270,000, exceeding the threshold by $20,000. The lesser of your contributions ($30,000) and the excess ($20,000) is the excess.
Division 293 tax of 15% x $20,000 = $3,000.
Therefore, $3,000 of your concessional cap is taxed at 30%, and $27,000 is taxed at 15%.
Why it matters
Salary sacrifice is particularly attractive to those on higher marginal tax rates (see below).
Division 293 reduced the benefit for higher-income earners, effectively raising the tax on contributions to a 30% rate in the portion liable for additional tax. This reduces the incremental advantage of contributing via superannuation compared to other investment vehicles.
Those with a balance in superannuation under $500,000 are also eligible to carry forward contributions. Any unused concessional contributions from the past five years can be used. If you are able to split these contributions across multiple years to stay under the threshold, it is worthwhile.
Importantly, the 30% remains more tax effective than the top two marginal tax rates, making superannuation an attractive place to save for retirement. A further benefit is the tax on earnings for those contributions is 15%.
However, it is worth considering potential credits or offsets for investing outside of superannuation like franking credits. If you are on the top marginal tax rate, it will reduce your tax liability on the dividend income to 15% + 2% Medicare levy. However, if you ever choose to dispose of the asset, superannuation would be a more favourable environment for capital gains tax.
Division 293 applies to all taxpayers who meet this threshold, and not just those who meet the limit consistently. Therefore, it is important for those who expect a one-off capital gain, an unexpected redundancy payment or bonus to consider Division 293 liabilities in that Financial Year.
How to pay
Once you have submitted your tax return, you will receive the Division 293 notice from the ATO. You can pay from your own funds or authorise your superfund to release the required amount to cover the liability.
How to prepare for Division 293
Follow the steps below to understand your Division 293 strategy:
- Estimate your income for the year, including sources outside of your salary.
- Estimate your concessional superannuation contributions for the financial year and compare your income and concessional contributions against the $250,000 threshold.
- Consider whether salary sacrifice is better deferred if you are expecting a bonus, capital gains or lump sum payment.
- If you receive a Division 293 assessment, understand whether it is better to pay from your superannuation or outside of super.
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