31 Jul Division 293 Tax Explained
What is Div. 293 Tax
Div. 293 tax is an additional 15% tax that may apply to the concessional contributions (CCs) of higher income earners.
Div. 293 tax is payable when your income and CCs, within their CC cap (known as ‘low tax contributions’), exceeds $250,000 in a financial year. Div. 293 tax may apply to all CCs including super guarantee and catch-up CCs but does not apply to excess CCs.
Div. 293 tax applies to lesser of:
▪ div. 293 income – $250,000, and
▪ non-excessive CCs.
The additional tax applies regardless of the type of super fund (eg accumulation or defined benefit), although different processes may apply.
Div. 293 tax is levied on the individual and not the super fund.
Even though Div. 293 tax may increase the effective tax on CCs to 30% for higher income clients, CCs can still be tax effective. This is because people who pay Div. 293 tax would generally have a marginal tax rate (MTR) of 47% – a higher rate than 30% tax on CCs and 15% on super fund earnings.
The following examples illustrate when Div. 293 tax may be payable.
Example 1
Bob earns a salary of $225,000 and his employer contributes $24,750 into super for him. He has no other sources of income for Div. 293 purposes.
Div. 293 tax is payable on the lesser of:
▪ $249,750 – $250,000 = $0 (cannot be less than zero), and
▪ $24,750.
▪ Bob does not incur Div. 293 tax.
Example 2
Bob from example 1 also earns $10,000 interest, taking his total income to $258,625. Div. 293 tax is payable on the lesser of:
▪ $259,750 – $250,000 = $9,750, and
▪ $24,750.
In this case, the first $15,000 in CCs would be taxed at 15% and the remaining $9,750 will be taxed at 30% (includes Div. 293 tax).
Example 3
Bob from example 1 earns a total income of $290,000, comprising salary, interest, a discount on vested employee shares and CCs.
Div. 293 tax is payable on the lesser of:
▪ $290,000 – $250,000 = $40,000, and
▪ $24,750.
In this scenario, all his CCs ($24,750) are taxed at 30% (includes Div. 293 tax).
Key definitions
Income
The definition1 of ‘income’ used to determine a taxpayer’s liability to pay Div. 293 tax is the addition of:
▪ taxable income
▪ reportable fringe benefits
▪ net financial investment loss
▪ net rental property loss
▪ net amount on which family trust distribution tax has been paid, and
▪ low tax contributions (see below). less
▪ super lump sum taxed elements with a zero tax rate, and
▪ assessable first home saver released amount.
Excess CCs do not incur Div. 293 tax but is included in a client’s taxable income when determining whether Div. 293 tax applies.
Strategy considerations
Reducing your Div. 293 income
You have limited opportunity to reduce your Div. 293 income. Taxable income can be reduced by relevant tax deductions, for example:
▪ deductible donations
▪ self-education expenses
▪ salary continuance premiums (self-owned), and
▪ professional subscriptions or memberships.
Incurring such expenses may not be appropriate for some people and the amount spent on the deductions may exceed any tax saved from Div. 293.
Strategies that are ineffective include:
▪ negative gearing, as net financial investment loss and net rental property loss are added back, and
▪ salary sacrifice or personal deductible contributions, as these amounts are captured in CCs (low tax contributions) which are included in the definition of income.
Internally taxed investment structures (eg super and investment bonds) may reduce an individual’s taxable income and consequently reduce income for Div. 293 purposes.
Are concessional contributions worthwhile?
Concessional contributions for individuals who pay Div. 293 tax may still be worthwhile. This is because an effective tax on contributions of 30% and earnings tax within the fund of 15% is less than the top MTR of 47%.
Super contributions for couples
Where one member of a couple is subject to Div.293 tax and cashflow does not allow both members of the couple to make maximum allowable CCs, consider which member of the couple would benefit most from the CCs. In some cases, there may be a greater benefit in the lower income earner making the CCs.
Example 5 – Members of a couple
One member of a couple is a higher income earner and is subject to Div. 293 tax on their CCs. Their spouse (whose MTR including Medicare Levy is 39%) could make CCs reducing taxable income.
If the higher income earner made the CCs, the tax savings are 17% (personal MTR less contributions tax less Div. 293 tax = 47% – 15% – 15%).
Tax savings for the lower income earner are 24% (personal MTR less contributions tax = 39% – 15%).
One-off income amounts
Various amounts received as assessable income could cause you to exceed the $250,000 threshold, including:
▪ the taxable component of super lump sums, for example:
– super lump sums received prior to age 60
– super lump sums containing an untaxed element
▪ super lump sum death benefits paid directly to a non-tax dependant (but not one paid via the deceased estate)
▪ the taxable amount of realised capital gains, and
▪ taxable payments on termination of employment.
This article was originally produced by MLC.
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Important information and disclaimer
The information provided in this document is general information only and does not constitute personal advice. It has been prepared without taking into account any of your individual objectives, financial solutions or needs. Before acting on this information you should consider its appropriateness, having regard to your own objectives, financial situation and needs. You should read the relevant Product Disclosure Statements and seek personal advice from a qualified financial adviser. From time to time we may send you informative updates and details of the range of services we can provide.
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