The Australian Government wants its citizens to be as wealthy as possible in retirement. This is why we have a superannuation system and tax breaks for people who top up their super voluntarily.

Around this time of year, with EOFY looming, it’s wise to take a look at your income to figure out if making additional contributions to your super can help you to pay less tax.

However, you do have to be aware of Division 293. This is an additional tax which can affect high-income earners who make before-tax contributions to their superannuation.

What is Division 293?

In Australia, Division 293 tax is an additional tax on super contributions, which generally affects high-income earners. It reduces the tax concession for individuals whose combined income and contributions are greater than a set threshold.

The tax was introduced in 2012 as part of the Federal Government’s efforts to reform the superannuation system and ensure high-income earners don’t benefit excessively from being able to use their superannuation as a tax shelter. Some have described it as a ‘super surcharge’ for the wealthy.

The initiative was initially designed to apply only to individuals with income exceeding $300,000, but the threshold was lowered to $250,000 in 2017. This means that if your combined income and concessional (taxable) superannuation contributions exceed $250,000, you may have to pay the Division 293 tax.

The Division 293 tax rate is 15% of the excess over $250,000.

For example, if you have a taxable income of $300,000 and make $30,000 in concessional contributions to your superannuation fund, your total income and contributions are $330,000. As this is over $250,000 you will be subject to the Division 293 tax of 15% of the superannuation contributions (30,000 x 15% = $4,500).

It is important to note that the Division 293 tax only applies to the concessional/before tax contributions you make to your superannuation fund. These contributions include employer contributions, salary sacrifice contributions, and personal contributions claimed as tax deductions. Non-concessional contributions, such as those made from your after-tax income, are not subject to the Division 293 tax.

Do you have to pay extra tax?

Many high income earners have a heads-up about Division 293 and are prepared for it.

However, the tax can catch you out if for some reason you have crossed the income threshold and haven’t realised. For example, you may have:

• Receive an eligible termination payout
• Sold an asset for a capital gain
• Been given a recent raise or bonus
• Switched to a strategy where you salary sacrifice into your super.

As shared by the ATO, the income component of the Division 293 tax calculation is based on:

• taxable income (assessable income minus allowable deductions)
• total reportable fringe benefits amounts
• net financial investment loss
• net rental property loss
• net amount on which family trust distribution tax has been paid
• super lump sum taxed elements with a zero tax rate
• assessable first home super saver released amount.

Per above, it helps to be aware of thresholds so you can plan your contributions and make sure they complement your tax minimisation strategy.

AFS & Associates are your partners in providing peace of mind. Get in touch if you would like some more advice about how to avoid paying excess tax for the 2022/2023 financial year.