In the latest CFS FirstTech podcast, Mr Day, head of technical services for Colonial First State and Linda Bruce, CFS senior technical services manager, said advisers should be aware these one-off life events may unexpectedly expose a client to a division 293 tax liability.
“We don’t just look at those people with lots and lots of salary up and over $250,000 [for Division 293 tax liability], we also have to worry about clients in a range of circumstances,” Ms Bruce said.
Division 293 tax is payable in addition to the standard 15 per cent tax that is generally paid on Concessional Contributions by most people.
For many people, concessional contributions are still worthwhile. Even though they will pay tax on their concessional contributions (within their cap) at 30%, this is still less than the top marginal tax rate of 47% (including Medicare levy) that applies to high-income earners who are liable for Division 293 tax.
Ms Bruce said events which may unexpectedly trigger a Division 293 tax liability aren’t necessarily unusual or uncommon, and include things like redundancy payments, payouts after a resignation that could include accrued sick and long-service leave, and even money inherited from deceased estates.
“You can have a client that doesn’t look like they would normally have to pay Division 293 tax all of a sudden having to take that into account, which can then flow through and affect the gross amount of tax having to be paid,” Ms Bruce said.
“We have recently been dealing with an adviser inquiry, where a retired client, who was 65 years old in the financial year 2021 2022. The client sold an investment property to fund his retirement and realised a taxable capital gain of $300,000.
“The $300,000 is now part of the assessable income and would ordinarily be taxed at 47 per cent assuming there are no other deductions. The client’s adviser identified how there might be strategy opportunities there and that the client was eligible to use the carrier forward Concessional Contribution rules.”
Ms Bruce said in this example the total CC cap in the last financial year was $110,000 and the client made a personal contribution of $100,000 as a deduction in their tax return which reduced the taxable income from $300,000 to $200,000.
As a result, that $100,000 could have been taxed at 47 per cent, but because of the adviser’s strategy, the $100,000 was initially taxed at 15 per cent.
However, there are still loopholes that can affect this type of strategy, Ms Bruce said, and in this case at the time of ATO reconciliation, the Tax Office identified that based on the tax return the client lodged and the information reported by the super fund, the client was told they owed the ATO Division 293 tax liability of $7,500.
“So effectively, that $100,000 personal deductible contribution was taxed at a rate of 22.5 per cent rather than the initial 15 per cent that everyone thought to be,” she said.
“The strategy was good. It was tax effective. However, the problem was, when the adviser provided advice, they didn’t really think of the client as a high-income earner. And they didn’t think of the client, could be up for the Division 293 tax liability.”
“At a high level, a client’s income for Division 293 purposes, is defined as their adjusted taxable income for Medicare levy surcharge purposes, plus their concessional contributions that they made during the financial year.”
Ms Bruce said advisers should identify a client’s taxable income to start with and add back their reportable fringe benefits and if there’s any investment losses that originally reduced the taxable income, to add back those investment losses that have been claimed as a deduction.
