From 1 July 2012, an additional 15 per cent tax on taxable superannuation (super) contributions, known as Division 293 tax, was introduced. The purpose was to make taxation on super fairer by reducing tax concessions available to very high income earners.
Prior to this, an individual on the highest marginal tax rate of 45 per cent paid 15 per cent tax on their pre-tax super contributions, effectively receiving a concession of 30 per cent. The new tax meant those individuals with income of at least $300,000 were now taxed at 30 per cent on these super contributions, cutting their tax concession to 15 per cent. The income threshold was reduced to $250,000 from the 2017/18 financial year.
Who does Division 293 tax apply to?
A client is liable to pay Division 293 tax if they exceed the income threshold and have taxable contributions to super during a financial year.
To determine whether a client is liable for Division 293 tax, these three steps should be followed for the relevant financial year:
Determine ‘income’ which is based on the Australian Taxation Office (ATO) defined ‘Income for Medicare levy surcharge purposes’ but excluding reportable super contributions. Reportable super contributions are the total of any personal deductible contributions, plus any reportable contributions by the client’s employer (including mandated employer contributions and any voluntary contributions, such as salary sacrifice);
Determine Division 293 super contributions;
Add these two numbers together.
If the total of the client’s income plus Division 293 contributions is greater than the threshold (currently $250,000), tax is levied on the lessor of the Division 293 super contributions and the amount above the threshold for that financial year.
These three steps are outlined in more detail below.
Determine income for surcharge purposes (excluding reportable super contributions)
– Taxable income.*
– Reportable fringe benefits.
– Net financial investment loss.
– Net rental property loss.
– Net amount on which family trust distribution tax has been paid.
– Taxable component of super lump sums paid within low rate cap ($215,000 in 2020/21 financial year) received by a client who has reached preservation age but is under age 60.
– Any assessable First Home Super Saver released amount included in taxable income.
* Remember – excess concessional contributions are added back into taxable income.
Determine Division 293 super contributions
This is the total concessional contributions minus excess concessional contributions, which includes:
– employer contributed amounts
– assessable foreign fund amounts
– other family/friend contributions
– personal contributions for which a deduction has been allowed
– defined benefit contributions.
For contributions to a Defined Benefit account, this is generally the non-grandfathered Notional Taxed Contribution (NTC).
For contributions to Constitutionally Protected Funds (CPFs), this is the sum of pre-tax contributions. This is regardless of the rule that when total concessional contributions to a CPF exceed the member’s concessional contribution cap, this will not result in a breach of the concessional contribution cap.
Is the total ‘Income’ and Division 293 super contributions more than $250,000?
If yes, then Division 293 tax is payable on the lesser of:
– Division 293 contributions, and
– the amount over $250,000.
If no, the Division 293 tax is not payable.
Example 1: Contributing to accumulation fund
Lincoln has ‘income for surcharge purposes’ (excluding reportable super contributions) of $245,000 and has made concessional contributions of $25,000 in the 2019/20 financial year to his accumulation account.
His combined income and Division 293 contributions total $270,000, which is $20,000 more than the $250,000 threshold applicable. As the Division 293 contributions (i.e. $25,000) are more than the excess of $20,000, the additional 15 per cent tax will apply to $20,000.
Example 2: Contributing to Constitutionally Protected Fund (CPF)
Milly is a member of a CPF and earned an annual salary of $320,000 in the 2019/20 financial year. Her employer makes contributions of 9.5 per cent ($30,400 per annum) to her CPF and she also salary sacrifices $100,000 of her annual salary to the CPF.
For the purpose of the concessional contribution cap, the total of Milly’s pre-tax contributions to the CPF are assessed as equaling her concessional contribution cap of $25,000 and she has no excess contributions. For Division 293 tax purposes, she will pay an additional 15 per cent tax on contributions of $130,400.
Defined benefit members
There is a modification to the way Division 293 super contributions are calculated for defined benefit accounts.
Defined benefit contributions for the purpose of Division 293 tax are prescribed by a formula outlined in the Income Tax Assessment Regulations 97. In practise, this generally equals the notional taxed contributions for the financial year, as reported by the fund to the ATO. Certain defined benefit members who joined the fund before 12 May 2009 may be grandfathered and therefore, have their notional tax contribution limited to the concessional contribution cap. However, for the purpose of Division 293 tax, their defined benefit contributions are equal to the non-grandfathered notional taxed contribution.
To determine Division 293 super contributions for defined benefit members, any contributions made to an accumulation account are first reduced by any excess contributions. This is then added to the defined benefit contributions. If this amount is negative, there are no Division 293 contributions and the tax is not payable. This outcome would only occur if the level of excess contributions exceeded the total of non-excess contributions to accumulation plus all defined benefit contributions.
Example 3: Member with defined benefit and accumulation account
Tess is a defined benefit member with an annual salary of $250,000 in the 2019/20 financial year. Her employer makes contributions of 14 per cent to her defined benefit and 3 per cent to an accumulation account. Tess also makes member contributions (pre-tax) of 8.25 per cent of her salary to the defined benefit.
Her notional taxed contribution to the defined benefit is calculated to be $36,000 in the 2019/20 financial year. However, as she has been a defined benefit member since 2000, she is eligible for grandfathering and therefore, her super fund advises the ATO she is a grandfathered member when reporting her notional taxed contribution. For concessional contribution cap purposes, her defined benefit contributions are viewed as being equal to her concessional contribution cap of $25,000 and she has excess contributions of $7,500 (being her employer 3 per cent contributions to her accumulation account).
The ATO determine her income for surcharge purposes (excluding reportable super contributions) is $260,000 and her Division 293 contributions are $36,000 ($7,500 – $7,500 + $36,000). She therefore pays Division 293 tax on $36,000.
An unexpected Division 293 tax liability
While a client may not normally pay Division 293 tax, certain one off events may increase their income in a financial year, bringing them over the $250,000 income threshold and attracting the additional 15 per cent contribution tax. Such events typically include:
Receiving a redundancy payment, which may include an employment termination payment and payout of accrued leave.
Realising a large capital gain.
One off bonus.
Lily is 50 and realises a large capital gain in the 2019/20 financial year, bringing her taxable income to $290,000. As her total super balance was less than $500,000 at 30 June 2019, she utilised her unused concessional contribution cap of $10,000 from the 2018/19 financial year to make total concessional contributions of $35,000 in the current financial year. Her ‘income for surcharge purposes excluding reportable super contributions’ exceeds the $250,000 threshold. Lily will pay additional 15 per cent tax on her total non-excess concessional contributions of $35,000.
What if the member has foreign income?
For tax purposes, clients who are an Australian resident are taxed on their worldwide income and therefore, must declare any foreign income in their income tax return.
Foreign income includes:
foreign pensions and annuities;
foreign employment income;
foreign investment income;
foreign business income; and
capital gains on overseas assets.
Foreign income which is included in taxable income will therefore fall within ‘income for surcharge purposes’.
Depending on the terms of Double Tax Agreement (DTA) with the foreign country, the client may receive a credit for any tax paid overseas to avoid double taxation.
For tax purposes, an individual who is not an Australian resident is only taxed on their Australian-sourced income.
Paying Division 293 tax – Accumulation members
The ATO determines if an individual is liable for Division 293 tax based on their completed income tax return and contribution information reported by their super funds.
For clients who have contributed to accumulation accounts, the ATO will issue a Division 293 Notice of Assessment, with the tax due to be payable within 21 days. The client can either pay the tax personally or complete a release authority within 60 days of the issuance of the Division 293 Notice of Assessment, requesting the funds be released from their super account.
If the client does not complete the release authority and has not paid all the Division 293 tax debt by the 60th day after the issuance of the Notice, then the ATO may issue a release authority to the individual’s super fund for any outstanding tax. Any funds released from super are non-assessable, non-exempt income. A client can choose to release funds from any of their accumulation accounts – not necessarily the same account the contributions were made to – or an income stream, such as an account-based pension.
Paying Division 293 tax – Defined benefit members
For clients with a defined benefit, the ATO will defer Division 293 tax to a deferred debt account and issue a Division 293 Notice of Assessment outlining the deferred amount and any amounts due and payable within a specified timeframe. For individuals with more than one defined benefit account, the Division 293 tax is apportioned and separate debt accounts are maintained.
Interest accrues on the deferred debt that remains unpaid at 30 June. The interest is based on the average 10 year Treasury bond rate for that financial year (which was 2.2547 per cent in the 2018/19 financial year).
A statement of account is maintained for the debt account, which allows the client to track their deferred liability.
The client can voluntarily repay the deferred debt:
out of their own pocket; or
by using the release authority form, issued with the assessment, to pay the tax debt out of their accumulation account within 60 days of issuance of the Notice.
By voluntarily paying deferred Division 293 tax before 30 June each year, the client can avoid paying end of year interest.
If the client elects not to voluntarily repay their debt and instead accrue the Division 293 tax deferred debt, once the defined benefit interest becomes payable, the amount accrued in the debt account must be paid. The super fund will send the ATO an End Benefit Notice within 14 days of the earlier of the super benefit becoming payable and receiving a request to pay the super benefit. This notice advises the end benefit cap amount and expected date of payment of the super benefit. The end benefit cap amount is calculated by the super fund and equals 15 per cent of the employer-financed component of that part of the value of the super interest that accrued after 1 July 2012.
Upon receiving the End Benefit Notice, the ATO will issue the client a ‘Debt account discharge liability’ notice, which details the amount they need to pay. This amount is the lower of the balance in their debt account, and the end benefit cap amount. Payment of the debt is due 21 days after the day the benefit was paid.
The client can pay the debt personally or complete a release authority to be given to the super provider that holds the defined benefit interest relevant to the debt.
Exemptions from Division 293 tax
An individual who is a state higher level office holder for any part of the financial year and who makes contributions to a CPF is exempt from having Division 293 tax applied to these contributions, except where the contributions are made as part of a salary packaging arrangement. A salary package contribution occurs when the client agrees with their employer for contributions to be made in return for a reduction in remuneration. The list of state higher level office holders can be found in the Income Tax Assessment Regulations 1997 and includes:
Minister of the government of a state;
Member of the parliament of a state;
Governor of a state; and
Head of a department of the public service of a state.
A justice of the High Court, or justice or judge of a court created by the parliament, is exempt from Division 293 tax on all super contributions to a super fund established under the Judges’ Pensions Act 1968.
Note that all contributions for both state higher level office holders and Commonwealth judges are still included when determining whether the $250,000 threshold has been exceeded.
Tips and traps
While the ATO has the discretion to disregard or reallocate excess contributions in certain circumstances, the same power does not apply to Division 293 tax.
If a client successfully bids the ATO to reallocate or disregard excess contributions, they become Division 293 (i.e. non excess) contributions and need to be included back into the Division 293 calculation. For contributions reallocated to a previous financial year, they become Division 293 super contributions in the year which they are reallocated to.
Where a person dies, the liability for any outstanding Division 293 debt will fall to the person’s legal personal representative or the deceased estate.
1. James is a member of a Constitutionally Protected Fund (CPF) and in 2019/20, salary sacrifices $80,000 to the CPF, in addition to his employer mandated contributions of $25,000 made to the same fund. He also does some casual work with a second employer, who pays Super Guarantee to an accumulation fund for him and in 2019/20, this totalled $10,000. James’ income is $400,000 in the 2019/20 financial year and he will pay Division 293 tax of:
2. Which of the following is not included in the definition of ‘Income for surcharge purposes’ for the purposes of determining liability for Division 293 tax?
a. Reportable fringe benefits.
b. Net investment loss.
c. Net amount on which family trust distribution tax has been paid.
d. Taxable component of super lump sums paid within low rate cap received by a client who has reached preservation age but is under age 60.
3. Mary is a defined benefit member and first became liable to pay Division 293 tax on her defined benefit contributions in the 2019/20 financial year. How does Mary pay this Division 293 tax?
a. The ATO will create a deferred Division 293 tax debt for Mary, to be paid once her defined benefit becomes payable. However, she can pay some or all of this debt earlier using her own funds or released funds from an accumulation account.
b. Upon receiving the Notice of Assessment, she has 21 days to pay the tax from her own monies or within 60 days elect to release the amount from her defined benefit account.
c. Upon receiving the Notice of Assessment, she has 21 days to pay the tax from her own monies or within 60 days elect to release the amount from an accumulation account.
d. The ATO will create a deferred Division 293 tax debt for Mary, which becomes payable once her defined benefit becomes payable. She cannot elect to pay any of the debt using funds in her accumulation account.
4. Interest on a deferred Division 293 defined benefit debt accrues at 30 June based on:
a. General interest charge.
b. Average 10 year Treasury bond rate.
c. 90 day bank accepted bill rate + 3 per cent.
5. Wyatt is 58 and in the 2019/20 financial year has taxable income of $280,000, which included a taxable lump sum super withdrawal of $40,000, which was within his low rate cap. His Division 293 super contributions were $20,000. Assuming he had no other ‘income’, what Division 293 tax will he pay?