By Alisa Sainoski

Dun. Dun. Dun. Dunnn… its Division 293 tax.

Division 293 sounds like a nightmare but in reality, it is the harmonisation of the concessional tax treatment higher income earners enjoy on some superannuation contributions.  Let’s say you are one of the many lucky people who earns near to or more than $250,000, your marginal tax rate is higher than the average income earner.  Therefore, by making pre-tax contributions to your superannuation, you will receive a proportionately larger tax benefit.  Division 293 imposes an additional tax of 15% in order to bring any tax benefit received back to an amount in-line with the average.  Division 293 tax is payable on the excess over the contributions threshold, or on the super contributions, whichever is less.  It was estimated by the Australian Taxation Office (‘ATO’) that 44,000 individuals would have receive their first ever Division 293 notice in 2019.

The ATO uses information from a taxpayer’s income tax return, and contributions reported by their superannuation fund, to work out the Division 293 tax owed by an individual by comparing this with the threshold.   Division 293 income is calculated by aggregating taxable income (assessable income minus allowable deductions), reportable fringe benefits, financial investment loss, rental property loss, and family trust distributions and any superannuation lump sum taxed elements with a zero tax rate.  Superannuation contributions equal an individual’s concessional contributions minus any Excess Concessional Contributions (‘ECC’).  The concessional contribution cap of $25,000 is deducted from personal contributions (i.e. a personal contribution $40,000 would be calculated as $40,000 – $25,000).  If the amount is higher than the cap the difference is ECC which is then included for Division 293 tax purposes.

A Division 293 tax assessment is made up of Division 293 Income plus Division 293 superannuation contributions.  The combined income and superannuation contributions less the Division 293 threshold will equal the amount above the threshold.  Additional tax will then also be paid from the taxable superannuation contributions which is the lesser of the amount above the threshold and the Division 293 super contribution cap.

Clear as mud?  Let’s look at an example:

Let’s say you have earned $320,000 and your employer contributes an additional $20,000 to your super fund via salary sacrifice.  Your superannuation fund will pay tax of $3,000 on this contribution ($20,000 x 15%).  If you had not contributed the $20,000 as salary sacrifice superannuation, you would have earned $340,000 ($320,000 + $20,000) and the additional $20,000 would have been taxed at the top marginal rate of 45% (plus Medicare Levy).  You would have paid $9,000 tax on the additional $20,000.

So, as a result of contributing $20,000 to your superannuation via salary sacrifice, you have received a $6,000 tax concession ($9,000 – $3,000).  By paying Division 293 tax of $3,000 ($20,000 x 15%) you still receive a concession but it is reduced.

The total amount of tax paid on the contribution will be $6,000 ($20,000 x 30% (made up of 15% taxed in the fund and 15% Division 293 tax)).  The tax concession is now $3,000 ($9,000-$6,000).

When the ATO works out a taxpayer’s concessional contributions to superannuation for Division 293 purposes, it does not include any amounts which are above excess contributions cap of $25,000.  This is because these contributions are taxed at the top marginal rate, so the taxpayer does not receive concessional tax treatment.

The ECC will be included in your income tax return as taxable income.  So using another example, let’s say your employer contributions equal $29,900, $4,900 more than the ECC ($29,900 – $25,000).  The difference of $4,900 will be included in your income tax return as part of your income.  This in turn increases your taxable income and your Medicare Levy liability.

If you have ECC you will also be required to pay Excess Concessional Contributions Charge.  This charge is based on the amount of the individual’s income tax liability for the income year in which the ECC occurs.  The interest charges apply from the first day of the income year in which the ECC are incurred.  It ceases to apply on the day before the date on which a payment is due under an individual’s first notice of assessment for the year.  Unfortunately, unlike other interest charges the ATO is able to apply, this particular charge cannot be remitted.

In order to avoid paying penalty interest, the Division 293 tax needs to be paid on or before the due date.  Division 293 tax liabilities can be paid either with your own money or by releasing money from your superannuation fund.  A request must be made to the Commissioner of Taxation in order to do this via an election form.  If you are registered with MyGov and are linked to the ATO Online Services, you may complete the election form online.

There is up to 60 days from the date of the Division 293 assessment to make the election.  The 60 day period only provides additional time for you to make a decision regarding how the tax is to be paid (i.e. personally or via the superannuation fund).  It does not change the due date for payment of your Division 293 tax liability.

Understanding the choices available and the process involved in paying Division 293 tax, can assist in ensuring any tax payable is completed in a manner most appropriate to an your individual circumstances.

We note, (just because we have to!) the information above is a general overview of Division 293 and does not consider the particular circumstances of each individual.  We would be please to discuss with you your individual requirements in relation to this or any other tax matter.

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