Australia’s superannuation system is designed to help individuals save for retirement through tax-effective means. While superannuation contributions generally benefit from concessional tax treatment, the government has measures to ensure equity in the tax system, particularly for high income earners. One such measure is the Division 293 tax. This article explores what the Division 293 tax is, when and how it is applied, and the historical context of its introduction.
What is Division 293 tax?
Division 293 tax is an additional tax on superannuation contributions for individuals whose income, combined with certain super contributions, exceeds a specified threshold. The purpose of Division 293 tax is to reduce the extent to which high-income earners benefit from the concessional tax rates that apply to superannuation contributions, thereby increasing the fairness of the tax system.
When was Division 293 tax introduced?
The Division 293 tax was introduced as part of the Superannuation (Sustaining the Superannuation Contribution Concession) Imposition Act 2012. It was one of several changes implemented by the Australian Government to address the perceived imbalance where high-income individuals were receiving disproportionate tax concessions on their superannuation contributions compared to average income earners.
The tax came into effect for concessional contributions made on or after 1 July 2012. The introduction formed part of broader tax reforms and was influenced by the recommendations of the Henry Tax Review, which highlighted the need for a more equitable system of superannuation taxation.
Since its establishment in 2012, there have been a few notable changes:
- The threshold was reduced from $300,000 to $250,000 from 1 July 2017.
- The concessional contributions cap has been updated periodically, affecting the amounts subject to the tax.
- ATO processes for communication and payment have become more streamlined to accommodate the growing number of affected individuals.
How does Division 293 tax work?
Thresholds and calculation
Division 293 tax applies to individuals whose income and certain superannuation contributions exceed a particular threshold in a financial year. As of the time of writing, the threshold is $250,000 per annum. Originally, when first introduced, the threshold was set at $300,000 but was reduced to $250,000 from 1 July 2017.
The tax is calculated at a rate of 15% on the lesser of:
- The amount of concessional contributions made for the individual during the financial year, or
- The amount by which the individual’s income plus concessional contributions exceeds the Division 293 threshold.
This means that for affected individuals, the effective tax rate on concessional super contributions increases from 15% to 30% for amounts above the threshold.
What is included in “Income” for Division 293 purposes?
For the purpose of Division 293, “income” is broadly defined and may be higher than taxable income reported on the individual’s tax return. It includes:
- Taxable income
- Reportable fringe benefits
- Net investment losses (including rental losses)
- Reportable employer superannuation contributions
- Other adjustments, such as some family trust distributions
After calculating the total income and concessional contributions, if the sum exceeds the current threshold of $250,000, Division 293 tax may be payable.
Concessional contributions defined
Concessional contributions are those that are made to a superannuation fund before tax. This includes:
- Employer contributions (including superannuation guarantee, salary sacrifice and other employer contributions)
- Personal contributions for which a tax deduction is claimed
The concessional contributions cap for each individual is set by the government and may change over time. This cap currently stands at $30,000 per annum. Exceeding this cap can result in additional tax liabilities.
For Division 293 tax purposes, excess contributions are not included as part of the calculation. However, Division 293 tax will be payable on additional contributions made as part of a carried forward unused concessional contribution strategy and therefore careful consideration around the additional tax consequence of making additional contributions should be made. Furthermore, clients that are nearing the $250,000 threshold need to be mindful of bracket creep.
Upon assessment
Once assessed, the Australian Taxation Office issues a Division 293 notice of assessment. Individuals can pay this tax in two main ways:
- Directly, from their own savings or resources
- By electing to release funds from their superannuation account using a “Release Authority” form, which instructs the super fund to send the payment directly to the ATO
There is a strict timeframe within which the tax needs to be paid, and failure to do so may incur interest or penalties.
The Division 293 tax represents a targeted approach by the Australian Government to ensure the tax concessions provided through the superannuation system are distributed more equitably. By imposing an additional 15% tax on the concessional super contributions of high-income earners, Division 293 seeks to balance the benefits of retirement saving incentives with the principles of fairness and fiscal responsibility. As superannuation and tax laws continue to evolve, it is important for high income earners to remain informed about the thresholds, calculation methods, and other income tax related changes to manage their retirement effectively.
