Division 293 tax – when is it paid?

Division 293 tax is the name given to a special extra tax (15%) paid on some or all of the concessional superannuation contributions made for high income earners. For this purpose, a high income earner is anyone who earns $250,000 or more and this amount includes their concessional contributions within the concessional contributions cap.

While the tax relates to superannuation contributions, it is actually levied on individuals rather than their superannuation funds. They are, however, allowed to access money from their superannuation to pay it.

An emerging challenge for those subject to this tax is: when can money be withdrawn from superannuation to pay it?

Like a number of other special superannuation taxes, there is a specific process to follow when it comes to Division 293 tax.

Even where an individual knows full well that their concessional contributions will be taxed at 30% (both the normal 15% tax rate plus the extra 15% that applies under Division 293), this is not reflected at the time their superannuation fund’s annual return is lodged.

Instead, the ATO uses the information in the fund’s annual return and the individual’s personal tax return to work out that Division 293 applies. If it does, a determination is then issued to the individual showing the amount of extra tax that needs to be paid.

An individual can then choose to:

• pay it themselves from their personal bank account, or
• use a special release authority that accompanies the determination to pay it out of their superannuation fund.

Importantly, it is only at this point that money can be released from the superannuation fund to pay the tax. Releasing it earlier is effectively paying a superannuation benefit to the member. This might well be illegal if the member is not yet old enough to take money out of their fund.

The fact that Division 293 tax is a personal tax charge rather than one levied on the fund means that any tax installments that the fund has paid during the year won’t count towards the Division 293 bill. 

It also won’t be a way of using the fund’s franking credits – because it’s not a tax on the fund, it’s a tax on the individual.

Any amount released from superannuation to pay it is technically a special type of superannuation benefit. This provides some interesting opportunities in that:

• if the member has multiple accounts (an accumulation account and one or more pensions), the payment could be withdrawn from whichever one has the highest taxable proportion on the basis that it makes no difference to the tax treatment of the withdrawal but may maximise the tax-free amount left in the member’s superannuation account. This is the case even if the concessional contributions were actually made to a different account or even a different superannuation fund,
• if the payment is to be withdrawn from a retirement phase account-based pension, the member could partially commute the pension to pay the excess (clawing back some of the Transfer Balance Cap).

Division 293 tax affects relatively few people, and this is perhaps one of the reasons it remains complex for practitioners. Perhaps the single most important thing to remember is, if a superannuation fund is to pay the tax (either to the ATO or to reimburse the member), to act on the release authority from the ATO, and not before.

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