Ask An Adviser - What Is The Best Tax Strategy When Contributing To Super? (1)

Top answer provided by:

Mark Candy

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Hi Pauli,

Thanks for the great question.

To determine what may be the best tax strategy for you, given what you have presented, a quick review of Division 293 tax is in order.

As you well know, Division 293 tax is an extra charge imposed on some superannuation contributions made by high income earners to reduce the tax benefits they receive from the superannuation system.

Superannuation contributions included for Division 293 tax purposes are concessional contributions such as:

-Personal superannuation contributions for which you claim a tax deduction,
-Salary sacrifice payments,
-SG contributions made by your employer, and
-Defined benefit contributions if you are a member of a defined benefit fund.

Should your income, plus any concessional superannuation contributions, exceed more than $250,000 in any one financial year, then you become liable for Division 293 tax of 15% on the amount of concessional contributions above this threshold. This extra 15% tax is applied under these rules because, as a high-income earner, your marginal tax rate (less the Medicare levy of 2%) for income above $180,000 is 45% (financial year 2022/2023 and 2023/2024). When you make a concessional contribution into superannuation, you only pay tax at the rate of 15%.

It is important to remember that you will be liable for the extra tax on either your Division 293 superannuation contributions, or the amount that is over the current threshold, which ever amount is lower!

As I see it, there are two options available to you however, both options still trigger a Division 293 tax, given the amount of taxable income that you have earned, the key difference being, the amount of total tax that you will need to pay.

Taxable Income Position:

$130,000 of gross income + $211,000 of after discount CGT = $341,000 of taxable income.

$11,000 of current year concessional contributions + $50,000 of carried forward concessional contributions (which include $15,000 from financial year 2018/2019) = $61,000 of concessional contributions to claim.

Option 1

Claim full concessional contributions of $61,000.

$341,000 of taxable income + $61,000 of concessional contributions = $402,000 income.

$402,000 - $250,000 which is the Division 293 threshold = $152,000 over the Division 293 threshold.

$61,000 concessional contribution is the lesser amount; therefore 15% tax on this is $9,150.

Tax on taxable income

$341,00 gross income - $61,000 of concessional contributions = $280,000 net taxable income.

$102,267 total tax payable, based on your marginal tax rate.

Therefore, total tax to pay is $102,267 + $9,150 = $111,417.

Option 2

Only claim concessional contribution cap of $27,500.

$341,000 of taxable income + $27,500 (concessional contribution cap) = $368,500 income.

$368,500 - $250,000 which is the Division 293 threshold = $118,500 over the Division 293 threshold.

$27,500 concessional contribution is the lesser amount; therefore 15% tax on this is $4,125.

Tax on taxable income

$341,00 gross income - $27,500 of concessional contributions = $313,500 net taxable income.

$118,012 total tax payable, based on your marginal tax rate.

Therefore, total tax to pay is $118,012 + $4,125 = $122,137.

Based on the above, option 1 provides the less tax payable overall.

Paying a Division 293 tax debt

Calculating any Division 293 tax is normally done by the ATO after you lodge your income tax return. It includes the information from your return, with data from the member contribution statements it receives from super funds, and the annual return from your SMSF (if you are an SMSF member).

If you are required to pay any tax, you will receive an assessment notice from the ATO or a notice in your myGov inbox if you lodged your tax return using myTax.

You can choose to pay a Division 293 tax bill either with your own money, or by electing to use your existing super account balance via myGov. If you want to pay with your super balance but can’t access myGov, you can complete and submit a Division 293 tax due and payable election form to the ATO.

Pauli, I hope you find the above response of value, and where warranted, it is always prudent to seek specialist tax and/or financial planning advice to assist you in achieving the best outcome possible, based on your circumstances.

I wish you every success in the future.

Note: In providing my response to you, as we do not know all your personal circumstances, I have made the following assumption that all superannuation contributed concessionally, is via personal contributions, and does not include any employer contributions. Should this not be the case, and the $11,000 is an employer contribution, then this amount will not form part of the tax deduction but will still need to be included in the Division 293 calculation. This response is general in nature and please seek specialist tax advice when completing your tax return.

While the Adviser Ratings Website facilitates the question and answer functionality, all such communications are between users and authorised financial advisers, of which Adviser Ratings has no affiliation. Adviser Ratings is not the advice provider and does not provide financial product advice and only provides information that is general in nature.

Article by:

Mark Candy

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