In the latest episode of the FirstTech podcast, Tim Sanderson, senior technical manager at Colonial First State, highlighted that when clients pay Division 293 tax from a bank account, they are essentially using funds that have already been subjected to individual tax – most likely at the top marginal tax rate of 47 per cent. On the other hand, if they choose to withdraw the funds from their superannuation, the amount has already incurred a tax within the super system, capped at 15 per cent, and the released amount will not face additional taxation.
“From an immediate tax perspective, it is true that if the client pays the liability from super, it’s generally been paid for by money that’s been subject to more concessional taxation,” Mr Sanderson said.
“But it’s also important to remember that because the client has the accumulated cash to pay the tax personal and has a super balance that it can be released from, that tax treatment that has already been applied to those two amounts still exists regardless of where the liability ends up being paid from.”
Mr Sanderson gave an example of a client who earns $300,000 per year and has already received a $4,000 division 293 tax notice. The client could use the $4,000 sitting in their bank account to pay this or they could release it from super.
“That client will have already paid income tax of up to $3,547 to get the net $4,000 in their bank account but in super, assuming it contains a taxable component, the concessional tax is about $706 or less that they will have paid to get the net $4,000 amount to be released,” he said.
“In total, the $8,000 available to the client to pay the Division 293 tax has already been subject to a total tax of about $4,250 regardless of where that liability is paid from. ”
He said there is no difference from an immediate tax perspective as the client gets the same outcome regardless of what they do, because the income has already been earned, and the tax already paid.
However, besides tax issues, there are other factors that advisers need to consider according to Linda Bruce, senior technical services manager at CFS.
“A payment of a release authority is not subject to the proportioning rules. Practically this means that if the client’s super accumulation benefit has sufficient taxable component, the amount specified by the ATO’s release authority will effectively be paid from the taxable component only. This applies to any payment of a release authority issued by the ATO including Division 293 tax,” she said.
“This means that rather than paying the tax bill directly from the bank account, it can be beneficial for some clients with available non-concessional contributions cap to elect to release the amount from super to pay the tax bill, but then they can make a non-concessional super contribution using the money saved in the bank account to restore their retirement savings.”
In this case, the Division 293 tax liability will effectively reduce the taxable component, whereas the non-concessional contributions will be added to the tax-free component of the client’s super benefit.
Ms Bruce said although the super balance remains the same, by adopting this strategy, the client will have a less taxable component and a higher tax-free component.
“It is something to consider for estate planning purposes,” she said.
“In the event of the client’s death, the client’s adult children can benefit from a lower taxable component included in the super death benefit payment which means that the children will pay less beneficiary tax.”
