Many people disregard the extra 15% tax Labor wants to impose on super contributions for those who earn more than $200,000 a year (reduced from the current $250,000). They think it does not apply to them because their salary is nowhere near this amount. But it’s not just about salary. It includes much more.
Division 293 tax is broader than most people think
Labor's plan is to reduce the income threshold to $200,000 where the additional contributions tax (Division 293 tax) applies. Division 293 tax is an additional 15% tax on taxable super contributions for people whose combined income and contributions exceed $250,000 a year.
Taxable contributions are concessional (pre-tax) contributions which are employer contributions, including compulsory super and salary-sacrifice contributions, and personal contributions for which a tax deduction is claimed.
It does not apply to non-concessional (after-tax) contributions.
Income for Division 293 tax purposes includes your taxable income (assessable income less allowable deductions), reportable fringe benefits, net investment losses and rental property losses (i.e. negative gearing losses) and any amount on which family trust distribution tax is paid.
What people fail to take into account, though, is that assessable income also includes investment earnings, assessable capital gains (say from the sale of an investment property or parcel of shares they’ve inherited), payments on termination of employment and franking credits on dividend income.
This income together with their concessional contributions (including compulsory super) may push them over the threshold in a year and expose them to additional tax they didn’t expect.
How the calculation works
Take Ron whose salary package including superannuation is $150,000 a year – i.e. $136,986 cash salary and compulsory super of $13,014. Ron makes a personal deductible contribution of $11,986 to take him up to the concessional contributions cap of $25,000.
His income for Division 293 tax purposes comprises net salary of $125,000 ($136,986 minus $11,986), interest income of $5,000, an $80,000 capital gain from the sale of a rental property during the year and a rental loss of $15,000 before the sale of that property. Accordingly, his income ($225,000) and taxable super contributions ($25,000) combined is $250,000 and he doesn’t pay additional contributions tax.
(That's not a typo: the rental loss is also added on for the Division 293 calculation).
However, if Ron earns $1 more, he will pay the usual 45¢ in income tax plus 2¢ in Medicare levy. Plus now he will also pay 15% extra in Division 293 tax because this tax is paid on his taxable super contributions that take his income over the $250,000 threshold. This is effectively 62% tax on that one dollar of extra income. Ron keeps just 38¢ of what he’s just earned.
And if Ron doesn’t have private health insurance then there’s another 1.5¢ Medicare Levy Surcharge, making it 63.5% tax, eroding even further what he takes home. This is the case for up to $25,000 of income from $250,000 to $275,000.
Ron may be able to avoid this tax as it comes down to the source of his income. If all his income came from employment, there’s little he can do. However, as he’s got investment income, he could consider moving his investments into tax structures where earnings aren’t derived in his name, such as super or an investment bond.
Dropping the threshold to $200,000 a year will obviously capture more people in this tax net. In Ron’s case, he would face a $3,750 Division 293 tax bill.
Colin Lewis is Head of Strategic Advice at Fitzpatricks Private Wealth. A version of this article appeared in The Australian Financial Review. The article is general information and does not consider the circumstances of any individual.