Beware of overlooking Div 293 tax: adviser
Division 293 tax does not just apply to high-income earners but can be a result of taxable income from other sources such as capital gains, employment termination payment or receiving a taxable super death benefit, says an industry adviser.
Craig Day, head of technical services for Colonial First State, said he has seen an uptick in adviser questions relating to clients claiming tax deductions for their contributions, and how that may impact their liability to any Div 293 tax.
“Many advisers are aware that Div 293 tax applies to their high-income earning clients who have incomes of around $250,000 or higher from employment or self-employment, but perhaps it's less well known that it can also apply in situations that the client may not otherwise expect,” Day said.
Peter Wheatland, senior technical analyst for CFS, said the income test for Div 293 is largely based on the client's taxable income, not just employment income, and it's not only applicable to individuals with a higher salary, but can also be applicable where the client has significant taxable income from things such as capital gains, receiving an employment termination payment, or even receiving a taxable super death benefit.
“When a client receives taxable income from one of these, for example, a one-off event from selling an investment property or receiving a death benefit lump sum, advisers will potentially consider recommending that they use these lump sums amounts to make potentially large personal deductible contributions using the carry forward rules to help them reduce tax,” Wheatland said.
“If the client’s income is not normally that high, the adviser may not think of them as a high-income earner and therefore not put two and two together and realise that Div 293 tax may also apply to their personal deductible contribution.”
Wheatland said if a client’s Div 293 income is less than $250,000, a personal deductible contribution to super is not going to incur Div 293 tax, but if the Div 293 income is over $250,000, then that tax will apply to at least some of the client’s concessional contributions for that year.
Wheatland said that although in its simplest definition, Div 293 tax is largely based on taxable income, there are several additions and exceptions from that income definition, with some of the more common additions being reportable fringe benefits, total net investment losses, and concessional contributions that are within the member’s concessional cap.
He added that Div 293 taxes are only applied to the portion of concessional contributions that causes the individual to exceed the $250,000 threshold.
“For example, if the client had a taxable income of $250,000 plus $10,000 of super guarantee payments, their total Div 293 income would be $260,000. If they make a personal deductible contribution of $20,000 their concessional contributions for the year will be $30,000,” he said.
“Their Div 293 income will still be $260,000 but that is made up of $230,000 of taxable income, and $30,000 of concessional contributions, which make up the top slice of the member’s income. As a result, only $10,000 of those contributions exceed the $250,000 threshold, and therefore Div 293 tax is only applied to $10,000, not the entire concessional contribution.”
If a client has a Div 293 income that is way above the threshold, for example, $500,000, and is making a personal deductible contribution of $100,000 using the catch-up concessional contribution rules, the Div 293 income would be $500,000 made up of $400,000 taxable income, and the $100,000 concessional contribution, and the Div 293 tax applies to the entire concessional contribution.
“The important thing to remember is that depending on the client's level of Div 293 income, making a personal deductible contribution to super may or may not result in an increase in their Div 293 tax, but even if it does it is not necessarily a bad strategy,” he said.
