Introduction
Division 293 tax is a subject that often comes up among high-income earners, including medical professionals. It’s a tax designed to level the playing field by reducing the tax concession on superannuation contributions for individuals with higher incomes. In this article, we’ll explore what Division 293 is, the difference between taxable income and adjusted taxable income, and discuss the effectiveness of strategies to minimise its impact.
What is Division 293 Tax?
Division 293 tax is an additional tax on superannuation contributions, which aims to reduce the tax benefits that high-income earners receive within the super system. It applies to individuals whose Adjusted Taxable Income (ATI) exceed $250,000 per annum (as at the date of this article). The tax is charged at 15% of the excess over the threshold or the taxable super contributions, whichever is less.
The tax was introduced in an attempt to provide equity in the tax advantages provided by the superannuation system. It was introduced as a measure to reduce the tax concession on superannuation contributions for individuals with higher incomes. This is because high-income earners can receive significant tax benefits from concessional super contributions due to their higher marginal tax rates. Division 293 seeks to reduce the tax savings for high-income earners closer to those available to average income earners, thereby maintaining fairness across different income levels.
Taxable Income vs. Adjusted Taxable Income
Understanding the difference between taxable income and adjusted taxable income (ATI) is crucial for medical professionals when considering Division 293 tax.
- Taxable Income: This is the total income you’re required to pay tax on after all deductions have been applied. It includes wages, business income, investments, and any other income for which you pay tax.
- Adjusted Taxable Income (ATI): ATI takes your taxable income and adjusts it by adding back certain items like total net investment losses, reportable fringe benefits, and reportable superannuation contributions. ATI is used to assess eligibility for various tax offsets and government benefits, as well as for determining the Division 293 tax liability.
Payment Options for a Division 293 Tax Liability
Clients can expect to receive their Division 293 tax notice from the Australian Taxation Office (ATO) after both their income tax return and contribution information from their super fund have been processed. Typically, the ATO sends out the ‘Additional tax on concessional contributions (Division 293) notice’ once they have all the necessary information to assess whether an individual is liable for the tax.
When it comes to settling a Division 293 tax liability, medical professionals have two main options:
- Pay with Personal Funds: You can choose to pay the Division 293 tax liability with your own money. This is a straightforward method where you directly pay the Australian Taxation Office (ATO) using funds from your bank account.
- Release from Superannuation: Alternatively, you can elect to release money from your superannuation to pay the Division 293 tax. This involves making an election to the ATO to release funds from your super account to cover the tax liability. It’s important to consider the impact this may have on your retirement savings and seek financial advice.
- Special considerations if you work in the South Australian Public Sector and have Super SA Triple S: Many Doctors and Medical Professionals may be able to pay for the Division 293 liability from cash reserves, however this may not be the best approach. Careful long-term modelling which factors in your likely total Triple S balances over time will likely determine if we recommend Division 293 be debited from Super SA Triple S.
By paying the Division 293 tax by the due date, you can avoid accruing interest on the amount owed. It’s crucial to manage this liability promptly to prevent any additional charges.
If you’re unsure about the best payment option for your situation or need assistance with the process, the team at Bartons is ready to help. Our team can guide you through the payment options and help you make an informed decision that aligns with your financial goals.
Strategies to Minimise Division 293 Tax
Division 293 tax is challenging to mitigate due to the re-addition of certain elements to calculate your Adjusted Taxable Income (ATI). However, understanding your projected income can help lessen its impact. For instance, if your ATI is anticipated to be $200,000 for this financial year, your superannuation contributions are expected to be exempt from Division 293. Conversely, if your income is expected to rise to $300,000 the following financial year, any extra concessional contributions will likely be subject to Division 293. This income fluctuation presents strategic opportunities to make significantly more tax-efficient contributions to your superannuation. The same general principle of timing can be applied to personal tax deductions.
Provided that trust distributions are not deemed personal services income, utilising a family trust setup could offer avenues to reduce Division 293 liability by splitting income and therefore reducing ATI.
It is crucial to consult with a tax professional to identify the most effective strategies tailored to your unique situation.
Call to Action
If you’re a medical professional potentially affected by Division 293 tax, it’s advisable to consult with an accountant or financial advisor who specialises in this area. At Bartons, we have a team of experts who can provide personalised advice and help you navigate the complexities of Division 293 tax. Book an appointment with us today to ensure you’re making the most of your superannuation contributions while minimising your tax liabilities.
This information is general advice only and does not take into account your objectives, financial situation and needs. Before making a financial decision based on this advice, you must consider whether it is appropriate in light of your needs, objectives and financial circumstances, and where relevant, obtain personal financial, taxation or legal advice. Where a financial product has been mentioned, you should obtain and read a copy of the Product Disclosure Statement prior to making any decisions.