Normally when I write articles, I try not to use technical jargon. However, as this article is about the new tax on superannuation contributions and will be referred to by everyone as the “Division 293 tax” I encourage you to also refer to it by this name.
I was most surprised at a recent meeting with SMSF professionals, to be told that a lot of their clients are complaining about this law and were unaware it affected them. These clients received a “surprise” tax assessment from the Australian Taxation Office (ATO) requesting payment due in 21 days. Before I explain all the nuts and bolts of this new law, let me explain how it came to be and its purpose.
What is a Division 293 Tax?
Division 293 tax is an additional 15% tax imposed on relevant concessionally taxed superannuation contributions (referred to as low tax contributions) made into self managed superannuation funds (SMSFs) by individuals whose income exceeds $300,000.
I don’t blame anyone for forgetting about this new law. The law was originally announced in the 2012 Federal Budget by the Gillard government as a “Reduction of the higher tax concession for contributions of very high income earners”. At the time it wasn’t actually referred to as the “Division 293 tax”. The law did not pass parliament until 28 June 2013. However, the commencement date was backdated to 1 July 2012.
The purpose of the law
The average income earner’s highest marginal income tax rate is 32.5% (excluding the Medicare Levy). Any superannuation contributions made for the benefit of the individual are taxed at 15% when in their SMSF, effectively giving them a 17.5% concession on their superannuation contributions. Individuals with high incomes pay 45% income tax on annual income over $180,000. Superannuation contributions made for the benefit of these individuals in their SMSF are taxed at 15%, effectively giving them a 30% concession. Division 293 tax applies an additional 15% tax to certain concessional contributions that effectively attracts the 30% concession, therefore reducing the actual concession down to 15%. The law brings the tax benefit for concessional contributions of very high income earners into line with the concessions received by average income earners.
Income and contributions included in the $300,000 threshold
An individual will be liable to pay Division 293 tax if the sum of their income plus their low tax contributions exceeds $300,000. To assess an individual’s income, the ATO will use the following information from the individual’s income tax return:
- 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)
These elements are added together (except the superannuation lump sum amount, which is subtracted) to give the income amount.
To calculate an individual’s low tax contributions, the ATO will use the following information from the individual’s member contributions statement and/or SMSF annual return:
- employer contributed amounts
- other family and friend contributions
- assessable foreign fund amounts
- assessable amounts transferred from reserves
- notional employer contributions, known as defined benefit contributions, when the fund is a defined benefit superannuation fund.
The above contributions are concessionally taxed within a superannuation fund. For Division 293 tax purposes they are known as low tax contributed amounts. The low tax contributions are equal to the low tax contributed amount minus excess concessional contributions. Therefore, low tax contributions do not include non-concessional contributions and concessional contributions that are subject to excess concessional contributions tax.
Division 293 tax will be charged at 15% on an individual’s concessional contributions above the $300,000 (up to the concessional contribution caps). There are special rules for members of defined benefit superannuation funds, constitutionally protected state higher level office holders, certain Commonwealth justices and temporary residents who departed Australia.
Division 293 tax calculation
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.
- An individual has an income of $291,000 and low tax contributions of $25,000. The sum of these two amounts is $316,000.
- $316,000 minus the threshold of $300,000 is $16,000. The low tax contributions is $25,000 and the excess is $16,000.
- The lesser amount is $16,000, therefore the individual has taxable contributions of $16,000.
- $16,000 x 15%. The amount of Division 293 tax levied on this individual is $2,400.
Division 293 tax notice of assessment
The Division 293 tax notice of assessment will state:
- the total earnings for tax purposes
- taxable contributions
- the amount of Division 293 tax that is due and payable by a set date.
Individuals are responsible for paying their Division 293 tax by the due date, which is generally 21 days after the ATO’s notice of assessment was issued.
Paying the Division 293 tax
The ATO will issue Division 293 tax notices of assessment in the name of the individual. The individual has three (3) options on how to pay the tax, namely:
- Pay the assessed tax out of their own monies.
- Pay the assessed tax and then seek to be reimbursed from their SMSF, or
- Pass on the notice of assessment to their SMSF (using a release authority) and have their SMSF pay the tax on their behalf.
Using a release authority
Individuals can send their release authority to their SMSF to have the money released. They can choose to have:
- the entire amount or a partial amount released from one SMSF, or
- partial amounts released from a number of superannuation funds.
To do the latter, photocopies can be made and presented to their superannuation funds, as long as there is an original signature on each photocopy and the total amount noted for release does not exceed the amount of the Division 293 tax.
Where they choose to have their superannuation funds pay the tax, they can nominate who the amount is to be released to, which can be either:
- to themselves, or
- to the ATO.
The due date for payment of the Division 293 tax is 21 days after the notice of assessment was issued. If they don’t pay the whole amount by the due date, a general interest charge will start to accrue.
Whether an individual receives the payment themselves from their SMSF or they ask their superannuation funds to release the amount to the ATO, the due date for payment remains 21 days after their notice of assessment is issued.
General Interest Charge (GIC)
The ATO acknowledges that where a release authority is used, there may be timing issues as superannuation funds are allowed thirty (30) days to process authorities. In these circumstances, the ATO will take this into account in considering applications for remission of GIC accrued during the superannuation fund’s processing period.