In the past few weeks, we’ve had a number of clients consult us with regards to an unexpected shock they’ve received from the tax office. This shock came in the form of the Division 293 tax which came into effect in the 2012 – 13 financial year, with the first assessments issued in January 2014.
What is Division 293 Tax?
The tax was introduced by the Labor Government as an additional 15% tax on relevant concessionally taxed superannuation contributions (referred to as low tax contributions) made to super funds (including SMSFs) by individuals whose income exceeds $300,000.
The purpose of the law
Originally the plan was to raise the tax for Australians who got the greatest benefit from the low tax rate paid on super contributions, while tax paid on contributions by those on the lowest rate of income was reduced.
Therefore if the average income earner’s marginal income tax rate is 32.5% (excluding Medicare Levy) then the superannuation contributions made for the benefit of the individual is taxed at a rate of 15%, effectively giving them a 17.5% tax concession. However by contrast, very high income earners pay 45% tax on income over $180,000 effectively giving them a 30% tax concession. Division 293 tax applies an additional 15% tax to certain concessional contributions effectively diluting the 30% concession to 15%, in line with the concessions received by average income earners.
In other words, the Division 293 tax is an additional tax for very high income earners to try and level the playing field amongst all Australians.
Income and Contributions included in Division 293 tax threshold
The tax is liable to any individual if the sum of their income plus their low tax contributions exceeds $300,000.
The ATO will use the following information from income tax returns:
- Taxable income (assessable income less deductions)
- Total reportable fringe benefits amounts
- Net financial investment loss
- Net rental property loss
- Amounts on which family trust distribution tax has been paid
- Superannuation lump sum taxed elements with a zero tax rate (because it falls within the low rate cap amount).
Low tax contributions for the purpose of Division 293 tax generally include:
- Employer-contributed amounts
- Other family and friend contributions
- Assessable foreign fund amounts
- Assessable amounts transferred from reserves
- Defined benefit contributions (funded and unfunded)
Division 293 tax of 15% will be charged on an individual’s concessional contributions above the $300,000 threshold (up to the concessional contribution caps).
How is Division 293 tax calculated?
To calculate the Division 293 tax liability the ATO will:
- Add the individual’s income and low tax contributions
- Compare the amount from step 1 to the $300,000 threshold to identify any excess above the threshold
- Compare the low tax contribution amount and the amount from step 2. Take the lesser of the two amounts, which then become the taxable contributions
- Apply a 15% tax rate to the taxable contributions
How to pay
The tax office assumes responsibility on the individual for paying their Division 293 tax. The following options are available:
- Pay the assessed tax out of their own monies
- Pay the assessed tax and then seek reimbursement from their fund, or
- Pass on the notice of assessment to their fund using a release authority to have their fund pay the tax on their behalf
A forth option has emerged wherein some individuals have found that the tax office has deducted their Division 293 tax for the 2013 financial year from their 2014 income tax refund.
Should an individual wish to use a release authority they can send one to their superannuation fund or SMSF to have the money released. They can chose to have the entire amount or a partial amount released from one fund or partial amounts released from a number of funds. Under the regulations the assessment from the tax office must be paid within 21 days while super funds have up to 30 days to make the payment to a member. Therefore it makes sense for an individual to pay the tax and then be reimbursed by the super fund.
For more information about Division 293 tax or to see whether may be liable, contact us on 02 9299 7044 or via firstname.lastname@example.org