Super changes for high income earners - Division 293 Tax
High income earners wishing to make superannuation contributions need to be aware of the Division 293 tax. Effective 1 July 2017, individuals earning over $250,000 will be charged a Division 293 tax, at a rate of 15% of the individuals’ taxable contributions. Super is taxed at 15% as a standard for employer contribution, and the 293 tax is an addition on top of this for high income earners. Previously, the threshold for Division 293 tax was $300,000. The calculation of Division 293 tax takes into consideration the individuals Division 293 income and Division 293 Superannuation.
Firstly, we will provide you with a breakdown of the key terms – Division 293 income and Division 293 superannuation. Division 293 income is calculated similarly to income for Medicare levy surcharge purposes minus any reportable superannuation contributions. Division 293 superannuation is calculated utilising information provided by the individuals superannuation fund to calculate the taxable contributions. Effectively, the individuals’ taxable contribution is the individuals’ concessional contributions less concessional contributions in excess of the contributions cap.
The purpose of the Division 293 tax is to make the system more equitable. Concessional contributions received to superannuation funds are taxed at a flat rate of 15%. This provides an incentive for high income earners to make concessional contributions to their superannuation fund. In an effort to make the system fairer, Division 293 imposes an additional 15% tax on high income earners, bringing it more into line with the higher marginal tax rates of high-income earners.
It is not only high-income earners that need to be aware of Division 293 tax. One-off events, that increase the individuals’ income to above the $250,000 threshold for Division 293 tax, may make the individual liable for the tax. These events include, but are not limited to, an eligible employer termination payment, making of a capital gain and salary sacrificing a portion of income to super.
Division 293 tax is calculated by comparing the individuals’ Division 293 income plus Division 293 superannuation contributions minus the Division 293 income threshold and the individuals Division 293 super contributions. The lower of these two amounts is taxed at 15%. For example, if an individual earns $235,000 in Division 293 income and makes $20,000 in Division 293 concessional superannuation contributions, their Division 293 tax is $750 ($5,000 * 15%). This is because the individuals Division 293 income plus Division 293 super contributions minus the Division 293 income threshold ($235,000+$20,000-$250,000 = $5000) is less than the Division 293 superannuation contributions ($20,000). Obviously, this calculation is not required for individuals whose income for Division 293 purposes is over $250,000. These individuals’ pay tax at a flat rate of 15% of their Division 293 concessional superannuation contributions.
The ATO utilises the individuals’ income tax return and information provided by the individuals superannuation fund to assess the individuals liability for Division 293 tax. The amounts showing on the individuals ‘additional tax on concessional contributions (Division 293) notice’ should be checked carefully. If an error is noted, the individuals may need to amend the individuals tax return or talk with the individuals’ superannuation fund in order to correct it.
If you have received an ‘additional tax on concessional contributions (Division 293) notice’ and are unsure how to proceed, contact The Great Bean Counters for some helpful advice.