Division 293 Tax: Complete Guide for High Income Earners

High income earners face an additional tax on their superannuation contributions that many are unaware of until they receive an unexpected notice from the ATO. Division 293 tax imposes an extra 15 per cent tax on concessional super contributions when your combined income and contributions exceed $250,000. This comprehensive guide explains how Division 293 works, who is affected, how the tax is calculated, and strategies to manage this additional liability while still benefiting from super's tax advantages.

What Is Division 293 Tax?

Division 293 tax is an additional 15 per cent tax on concessional superannuation contributions for high income earners. When combined with the standard 15 per cent contributions tax, this brings the total tax on concessional contributions to 30 per cent for affected individuals. The policy rationale is that high income earners who would otherwise pay the top marginal tax rate of 45 per cent plus Medicare levy receive a substantial tax benefit from super's 15 per cent rate. Division 293 reduces this benefit to bring it closer to the tax concession received by lower income earners.

The tax applies to concessional contributions, which include employer Super Guarantee contributions, salary sacrifice contributions, and personal contributions for which you claim a tax deduction. Non-concessional contributions made from after-tax money are not subject to Division 293 as they have already been taxed at your marginal rate. Understanding how this tax works is essential for effective financial planning if your income approaches or exceeds the threshold.

Who Pays Division 293 Tax?

Division 293 tax applies when the sum of your income for surcharge purposes plus your concessional super contributions exceeds $250,000. Income for surcharge purposes is a broad measure that includes taxable income, reportable fringe benefits, total net investment losses, and certain other amounts. This comprehensive definition is designed to capture your true economic income rather than just taxable income, which can be reduced through deductions.

It is important to note that you do not need to earn a salary of $250,000 to be affected. If your taxable income is $230,000 and your total concessional contributions are $30,000, your combined total of $260,000 exceeds the threshold, triggering Division 293 tax. Similarly, a one-off event like a capital gain from selling an investment property could push you over the threshold in a particular year even if your regular income is well below $250,000. Use our superannuation calculator to model how different contribution levels affect your overall retirement outcome.

How Division 293 Tax Is Calculated

The calculation of Division 293 tax depends on whether your income alone exceeds the threshold or only exceeds it when contributions are added. If your income for surcharge purposes exceeds $250,000 before adding contributions, the tax applies to all your concessional contributions. For example, with income of $280,000 and concessional contributions of $30,000, Division 293 tax is calculated on the full $30,000, resulting in additional tax of $4,500.

If your income for surcharge purposes is below $250,000 but exceeds it when contributions are added, the tax applies only to the excess. Using the earlier example of $230,000 income and $30,000 contributions, your combined total of $260,000 exceeds the threshold by $10,000. Division 293 tax applies only to that $10,000 excess, resulting in additional tax of $1,500. This partial application ensures the tax targets only the portion that genuinely exceeds the threshold.

How Division 293 Tax Is Collected

Unlike most taxes that are collected through your annual tax return, Division 293 tax is assessed separately by the ATO after you lodge your return. The ATO uses information from your tax return and reports from super funds to calculate your liability. You will receive a Division 293 notice of assessment, typically several months after your tax return is processed, advising the amount owing.

You then have a choice of how to pay the tax. You can pay the full amount directly to the ATO from your personal funds, or you can elect to release the amount from your superannuation fund. If you choose to release from super, you complete an ATO election form, and your fund will transfer the tax amount directly to the ATO. Releasing from super is often the preferred approach as it avoids using current cash flow and allows the tax to be paid from accumulated retirement savings. The release is treated as a separate debit and does not count as a contribution or benefit payment.

Is Super Still Worth It for High Income Earners?

Despite Division 293 tax, concessional super contributions remain highly tax-effective for high income earners. Even with the additional 15 per cent tax, the total 30 per cent tax rate on super contributions is substantially lower than the 47 per cent marginal rate, including Medicare levy, that would apply to that income outside super. A high income earner making $30,000 in concessional contributions saves $5,100 in tax compared to receiving the same amount as salary, even after Division 293.

Furthermore, the investment earnings within super are taxed at just 15 per cent, or zero per cent in pension phase, compared to marginal rates of up to 47 per cent on investments held personally. Over decades, this ongoing tax advantage on earnings significantly outweighs the impact of Division 293 on contributions. High income earners should generally continue making concessional contributions up to the cap, recognising that Division 293 reduces but does not eliminate the tax benefits of super.

Strategies to Manage Division 293 Tax

While Division 293 tax cannot be avoided if you exceed the threshold, several strategies can help manage its impact. First, understand your likely income each year and plan contributions accordingly. If you have variable income, you might choose to make larger contributions in years when total income is expected to remain below $250,000 and smaller contributions in high-income years.

Consider using non-concessional contributions strategically. While these do not provide an upfront tax deduction, they are not subject to Division 293 tax and still benefit from the tax-advantaged investment environment within super. For high income earners who have already maximised concessional contributions, non-concessional contributions can further boost retirement savings without additional super tax. Spouse contributions may also be valuable if your partner has lower income, as contributions to their super could be more tax-effective than additional contributions to your own account.

Impact of Income Fluctuations

Income fluctuations can significantly affect Division 293 liability from year to year. A bonus, commission income, capital gain, or business income spike might push you over the threshold in one year but not others. When planning contributions, consider your expected total income including all components, not just base salary.

If you anticipate a high-income year, you might consider making personal concessional contributions after the year ends but before lodging your return, giving you certainty about your actual income. However, be careful not to exceed the concessional contribution cap, as excess contributions face additional tax penalties. For those with highly variable income, maintaining flexibility in contribution timing while staying within caps allows adaptation to changing circumstances each year.

Division 293 and the Carry-Forward Rules

The carry-forward rules allowing unused concessional caps from previous years to be used can interact with Division 293 in important ways. If you are making large catch-up contributions, be aware that these still count as concessional contributions for Division 293 purposes. A substantial catch-up contribution in a single year could significantly increase your Division 293 liability for that year.

For example, if you have $50,000 in unused caps and decide to contribute the full amount plus your current year cap in one year, and your income is $220,000, your combined total of $300,000 would significantly exceed the threshold, triggering Division 293 on $50,000 of contributions. Spreading catch-up contributions across multiple years might reduce Division 293 tax if it keeps the combined total closer to the threshold in each year. However, there are trade-offs, as spreading contributions also delays getting money into super's tax-advantaged environment.

Administrative Considerations

Several administrative points are important for managing Division 293 tax. Ensure your super fund has accurate personal details, including your tax file number, to enable the ATO to correctly match contribution reports. Keep records of all contributions made, particularly if you make personal deductible contributions, to reconcile against your assessment.

If you receive a Division 293 assessment that you believe is incorrect, you can object through the standard ATO disputes process. Common errors include incorrect contribution reporting by super funds or failure to account for certain deductions. Review your assessment carefully against your records and seek professional advice if discrepancies exist. Finally, if you elect to release the tax from super, allow sufficient time for processing, as delays can result in interest charges.

Conclusion

Division 293 tax is an important consideration for high income earners, imposing an additional 15 per cent tax on concessional super contributions when combined income and contributions exceed $250,000. While this reduces the tax advantage of super contributions, the system remains highly beneficial even for those who pay Division 293. The total 30 per cent tax rate is still substantially below marginal personal tax rates, and ongoing tax advantages on investment earnings further enhance super's appeal.

Understanding how Division 293 works allows you to plan contributions strategically, manage cash flow for tax payments, and make informed decisions about concessional versus non-concessional contributions. High income earners should continue viewing superannuation as a valuable wealth-building vehicle while incorporating Division 293 into their broader tax and retirement planning. Professional advice can help optimise your approach based on your specific circumstances and goals.