Understanding Division 293 Tax: A Guide for High-Income Earners

Understanding Division 293 Tax A Guide for High-Income Earners

As a financial adviser, I often encounter clients who are surprised by an unexpected tax bill related to their superannuation contributions. This is usually the result of Division 293 tax, a levy that affects high-income earners. This article aims to shed some light on Division 293 tax and provide guidance on how to manage it effectively.

What is Division 293 Tax?

Division 293 tax is a levy introduced by the Australian Government to ensure that high-income earners pay a fair amount of tax on their superannuation contributions.

The purpose of Division 293 tax is to narrow the gap in the tax benefits obtained from superannuation contributions between high-income earners and the average taxpayer. Without this tax, high-income earners would receive a significantly larger tax concession on their super contributions compared to average-income earners.

Why is Division 293 Tax Being Charged?

High-income earners receive substantial tax benefits from the super system. These benefits are intended to encourage Australians to save for their retirement. However, without Division 293 tax, these benefits would disproportionately favour high-income earners.

For example, consider a client of mine, John, who recently sold an investment property. The sale pushed his income over the $250,000 threshold, resulting in a Div 293 tax charge. Although this was a one-off event, it highlights the situations where Div 293 tax can apply.

Another common occurrence is when you get a promotion or a large bonus which causes you to cross the $250,000 threshold.

How is Division 293 Tax Calculated?

The calculation of Division 293 tax involves several steps. First, your income for surcharge purposes (which includes your taxable income, reportable fringe benefits, total net investment loss, and super contributions) is calculated. If this amount exceeds the Division 293 threshold (currently $250,000), the tax is levied on the lesser of your concessional contributions or the amount above the $250,000 threshold.

Let’s illustrate this with an example. Suppose you have an income for surcharge purposes of $300,000 and made $25,000 in concessional super contributions. The Division 293 tax would be 15% of the lesser of $25,000 (your super contributions) or $50,000 (the amount by which your income exceeds the threshold). In this case, the tax would be 15% of $25,000, which equals $3,750.

All Concessional Contributions are taxed at 15%, so where Div 293 is present your total taxation on these excess contributions will be 30%.

How Can Division 293 Tax be Paid?

There are several options for paying Division 293 tax. You can pay it personally, or you can choose to have the amount released from your super fund or SMSF. If you don’t pay the tax by the due date, the Australian Taxation Office (ATO) may apply interest and penalties.

Strategies to Manage Division 293 Tax

There are several strategies you can use to manage Division 293 tax. These include timing your contributions to avoid exceeding the threshold, splitting contributions with your spouse, or using non-concessional contributions. However, these strategies depend on your individual circumstances, and it’s advisable to seek professional advice.

Conclusion

Understanding Division 293 tax is crucial for high-income earners. It’s not just about knowing how much you have to pay, but also understanding why you’re paying it and how you can manage it. As a financial adviser, I strongly recommend seeking professional advice to navigate Division 293 tax and other financial matters. Remember, promoting financial literacy is not just about imparting knowledge, but also about empowering you to make informed decisions about your financial future.

If you’re ready to take control of your financial future, consider reaching out to us.

We offer a complimentary 30-minute meeting to talk through where we can help.

We are a Brisbane Financial Advice practice, and we can service clients nationally over the phone or via online calls.

Government Resources

Using Government Resources such as the Australian Taxation Office can help you with any further information you require in understanding Div 293.

Please note that this article is intended to provide general information only and does not take into account your individual objectives, financial situation or needs. You should assess whether the information is appropriate for you and seek professional advice before making any investment decision.

Government Resources

Using Government Resources such as the Australian Taxation Office can help you with any further information you require in understanding Div 293.

Please note that this article is intended to provide general information only and does not take into account your individual objectives, financial situation or needs. You should assess whether the information is appropriate for you and seek professional advice before making any investment decision.

This information is true and correct as of 29 July 2024, prior to making any changes we recommend you read Government resources and seek Financial Advice prior to making any changes.

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