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DIV 293 – Beware the unexpected tax

Posted on June 11, 2018 by Braden Whelpdale

If your remuneration including reportable fringe benefits and salary sacrificed superannuation contributions is more than $250,000 pa, you may have an additional tax liability over and above the normal income tax payable on such earnings. Now that would be a substantial salary package, so it may seem like a good problem to have, but no-one likes an unexpected demand from the ATO. 

It started about five years ago when the government introduced a rule called Division 293 to the tax system. Division 293 is intended to even out the effect that the concessional tax treatment of superannuation has for higher income earners compared to middle and lower income earners. This results from before-tax (known as concessional) super contributions being taxed at 15% within a fund, and the higher relative difference in marginal rates for high income earners compared to the average. 

“If you are a high income earner, your marginal tax rate is higher than an average income earner,” the ATO says. “When you make concessional contributions to your fund, you receive a larger tax concession. Division 293 imposes an additional tax of 15% to bring the concession back to an amount in line with the average.” 

Division 293 may be better explained by using the worked example that the ATO has provided. 

“In the 2015-16 financial year Mark earns $320,000 and his employer contributes $20,000 to his superannuation fund. Mark’s fund pays tax of $3,000 on his contribution (15% × $20,000)”. 

If Mark’s employer had not contributed to super, Mark would have earned $340,000 and the additional $20,000 would have been taxed at his marginal rate of 49%. Mark would have paid $9,800 tax on the additional $20,000. The tax concession Mark would receive on his contributions is $6,800. 

“By paying Division 293 tax of $3,000 (15% × $20,000) Mark still receives a concession but it is reduced. The total amount of tax paid on the contribution is $6,000 (30% × $20,000, made up of 15% taxed in the fund and 15% Division 293 tax). The tax concession is now $3,800.” 

When Division 293 was introduced in the 2013- 14 year (the legislation was called “Sustaining the superannuation contribution concession”), the threshold at which it applied was set at $300,000 annual income for each individual. However in contrast to some other income thresholds and limits, which can tend to go up, this has now reduced to $250,000 (from July 1, 2017). 

That’s quite a drop in the threshold, and since it applies to the current financial year it is opportune to alert taxpayers to be circumspect as regards this aspect of taxation law. 

So if you or yours are at or near the new threshold, be aware that this division could be another consideration in your possible tax liabilities. The ATO uses information from income tax returns and contributions reported by your super fund to work out if Division 293 applies, and if so, how much tax is owed. And remember, as income levels can move year to year, there is potentially an annual possibility of Division 293 tax being imposed. 

Super – End of Financial Year ‘To Do’ and Tax Planning Opportunities

Posted on by Helen Cooper

Do you want the benefit of additional tax deductions whilst adding to your super nest egg?  The earnings on assets held in your super fund are taxed from 0% up to a maximum rate of 15% so it is important to utilise this concessional tax environment whilst saving for your retirement.  We want you to achieve the best results for you and your retirement so we have outlined below some tax planning opportunities that may assist in this regard.

As everyone’s circumstances are different, it is important to discuss any queries you may have. Please contact Piera-Lee or Helen in our Superannuation team to discuss your particular requirements in more detail.

Maximise concessional contributions

A $25k cap applies to everyone who is eligible to make contributions to super, generally those under 65 years of age.  If you meet the work test each year after age 65 you can continue to make concessional contributions up until age 75.

A Concessional Contribution is any contribution made into your superannuation account where the contributor claims a tax deduction for making the contribution.  For example, Employer Superannuation Guarantee payments, Salary Sacrifice Contributions you make or Personal Concessional Contributions you make into your fund.  15% tax is paid by the super fund on Concessional Contributions received so it is important that the rate of tax you are personally paying is higher than 15%.

You can now make Personal Concessional Contributions into your super fund to top-up your employer contributions maximising the $25k cap.  This allows you to claim a tax deduction in your personal 2018 Tax return for the amount you personally contribute to your super fund.
Please remember that if you exceed the $25k concessional contributions cap there are consequences and the contributions must be received by your super fund/s before or on 30 June 2018 to ensure the deduction can be claimed in the 2018 financial year.

Catch up concessional contributions

Individuals with a total superannuation balance below $500,000 can carry forward any unused concessional contributions cap amounts that accrue from 1 July 2018 onwards for up to five financial years. This allows eligible individuals who do not use all of their concessional cap in a particular financial year to carry forward their unused concessional cap amounts to future years.

This may assist if you have had for example a “tight” year from a cash flow perspective when you would usually try to contribute up to the maximum limit.

This new legislation is relevant to all individuals who can contribute to super and encourages employed persons to make additional lump sum tax deductible contributions which was previously limited to self-employed persons only.

To be eligible to make catch-up concessional contributions in a year the following conditions must be met:

A ‘total super balance’ of less than $500,000 as at 30 June at the end of the financial year immediately preceding the financial year in which the concessional contribution is to be made.

Have previously not used all the $25,000 concessional contributions cap in one or more of the five financial years preceding the year in which the concessional contribution is made.

Non-Concessional contributions (NCC’s)

A NCC is an after-tax contribution made into superannuation; a tax deduction cannot be claimed for NCC’s so no tax applies to NCC’s and they form part of the ‘tax-free component’ of your super entitlement.

The NCC cap is $100k or up to $300k can be contributed over a three year period.  Restrictions do apply, for example if you are aged over 65 years, if you triggered a bring forward in either the 2016 or 2017 financial years transitional arrangements apply and importantly those with a combined superannuation entitlement known as your Transfer Superannuation Balance Cap (TSB) of $1.6m or over, are not eligible to make NCC’s.

Please note that a contribution to a SMSF can be more than just a deposit of money into the bank account of the SMSF; it could include:

  • In-specie asset transfers
  • Paying SMSF expenses

Please contact our office for more information.

Making a tax free contribution into super after the sale of the family home

The Government’s new policy to allow homeowners aged 65 years or over to contribute up to $300k each into their super following the sale of their family home comes into effect from 1 July 2018.

Please see the following importation points and considerations summarised below:

  • The member making this special contribution must be aged 65 or more. There is no maximum age limit and the work test does not apply
  • No restriction if your superannuation entitlement i.e. Transfer Superannuation Balance is over $1.6m
  • The sale of the principal place of residence must occur on or after 1 July 2018
  • The principal place of residence must have been held for 10 or more years by the member making the contribution or their spouse (i.e. the proceeds from the sale of the home are either exempt or partially exempt from capital gains tax under the main residence exemption)
  • The dwelling must be in Australia and cannot be a mobile home
  • The contribution muse be made within 90 days of the home changing ownership
  • There is no requirement to buy a new home after the family home is sold
  • Couples will be able to contribute up to $300k each giving a total contribution of up to $600k
  • The contribution is tax free and does not count towards your non-concessional contribution cap (for those eligible to make NCC’s)
  • A new spouse can also qualify if they have lived at the residence for two years
  • Option for in specie contribution to be made in lieu of cash proceeds
  • The funds do not have to come from the proceeds of the family home e.g. The ‘downsizer’ new home may actually cost more than the family home that was sold but if other funds are available, the contribution can still be made
  • You can only take advantage of this measure as a once off
  • A ‘Downsizer Contribution Form’ is to be completed when making or prior to making the contribution
  • Your Super fund trust deed must allow for the fund to accept the Downsizer Contributions.  Please note if you have a SuperCentral Trust Deed and are participating in the annual renewal service, your SMSF can accept Downsizer Contributions as the SuperCentral Governing Rules were updated on 8 May 2018 to include provision for these contributions

Example  
Bob and Mary are both aged 76 and have not worked for many years.  They each have a pension balance of $1.6m and, because of the recent changes, they each have an accumulation balance of $100,000.

Bob and Mary can still each make $300,000 of downsizer contributions as they each have exhausted their transfer balance cap, the $300,000 can only increase their accumulation accounts and not their pension accounts.

Please be aware that depending on the value of the new home, removing some value from the ‘exempt’ family home will result the amount added to super being subject to tax (if the transfer balance cap space is nil) and will be exposed to the Centrelink means test.

Pension Drawings

Ensure you have drawn you minimum pension amount.  By not receiving the required minimum pension, any income earned on your pension entitlement will be taxed at 15% rather than being tax free.

Low Income Super Tax Offset (LISTO) for Low Income Earners

The low income super contribution (LISC) is a government superannuation payment of up to $500 to help low-income earners save for retirement. Individuals with an adjusted taxable income up to $37,000 will receive a refund into their superannuation account of the tax paid on their concessional superannuation contributions, up to a cap of $500. In effect, this means that most low income earners will pay no tax on their superannuation contributions.

Super co-contributions

If you are a low or middle-income earner and you make non concessional super contributions to your super fund in the 2018 financial year, the government makes a co-contribution up to a maximum amount of $500. The amount of the co-contribution payment you receive depends on your income and how much you contribute. To be eligible for a co-contribution:

  • You must have a Total Superannuation Balance less than the general transfer balance cap for that year (currently $1.6m)
  • If you earn $36,813 or less you will receive 50 cents for every dollar you contribute to your super fund in after tax dollars up to a maximum of $500 a year. A higher threshold of $51,813 applies so if your total income is between the two thresholds your maximum entitlement will reduce progressively as your income rises. You will not receive any co-contribution if your income is equal to or greater than the higher threshold.
  • The contribution you made to your super fund must not exceed your non-concessional contributions cap of $100k for the 2018 financial year.
  • 10% or more of your total income must come from employment related activities, carrying on a business or a combination of both.

Spouse tax offset

You can claim a tax offset up to a maximum of $540 for contributions you make to your spouse’s eligible super fund. From 1 July 2017, the spouse’s income threshold increased to $37,000.  The tax offset is 18% of the amount contributed up to a maximum of $540 (e.g. $3,000 x 18% = $540) and is available for any member, whether married or de facto, contributing to a recipient spouse. The offset is gradually reduced for income above this level and completely phases out at income above $40,000.

You will not be entitled to the tax offset when the spouse receiving the contribution has exceeded their non-concessional contributions cap for the relevant year, or has a total superannuation balance of $1.6m or more.

Super contributions splitting with your spouse

Contribution splitting allows you to split your concessional contributions (CC) from your accumulation super account with your spouse. This may be to top up an ‘under-funded’ spouses super or in some cases the strategy may be used to assist a fund member who is ‘on the margin’ in terms of accessing a non-concessional contribution (NCC) cap to manage their transfer superannuation balance.

For example if you are close to your $1.6m cap and you have the opportunity to make a NCC of up to $100k or $300k into your super account, having your spouse make a contribution for you may assist with keeping your total superannuation balance (TSB) under the $1.6m to allow the NCC contribution to be made.

Generally you can only request a contribution split from concessional contributions (CC) that were made in the previous financial year so the split CC is not included in the TSB of the receiving spouse until the income year in which it is transferred to them.

The maximum amount of contribution that can be split is the lesser of 85% of your concessional contributions for a financial year and $25k being the concessional contributions cap for the 2018 and 2019 financial years.

Concessional contributions can be split if your spouse is:

  • Under preservation age (see note below), regardless of working status or
  • Between preservation age and 65 years of age and has not permanently retired from the workforce or
  • Between ages 60 and 65 and has not terminated gainful employment after reaching age 60

Note – Preservation age is 55 years of age for those born before 1 July 1960 and up to age 60 for those born on 1 July 1964 or thereafter.

Non concessional contributions cannot be split with your spouse.

The ‘splitting spouse’, the one making the contribution on behalf of their spouse, is entitled to claim a tax deduction for a personal CC and the CC is counted against the CC cap of the ‘splitting spouse’ not the receiving spouse in the year the contribution is made by the ‘splitting spouse’.   The benefit is not treated as a contribution for the receiving spouse so no tax is payable by the receiving spouse.

The receiving spouse is still able to make a CC in the same year that the spouse contribution was transferred.

Any information provided in this article is general in nature and does not take into account your personal objectives, situation or needs. The information is objectively ascertainable and was not intended to imply any recommendation or opinion about a financial product. This does not constitute financial produce advice under the Corporations Act 2001. 

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