• 2. Division 293 Tax

    2.1 Amount of income

    2.2 Types of contributions

    2.3 Constitutional issues.

    High-income earners receive a significantly larger tax concession on super contributions than average income earners.

    Concessional contributions that are included in the assessable income of super funds are subject to a flat rate of tax of 15%, regardless of the income of the members of the fund.

    If the super contributions made for the person had instead been included in their salary and wages or business income, the high-income earning person would have been taxed on this income at a marginal tax rate of 45%. As a result, they effectively receive a 30% tax concession on their super contributions.

    In contrast, average income earners are subject to a marginal tax rate of 32.5%, and effectively receive a 17.5% tax concession on their super contributions.

    The above tax rates exclude the Medicare levy.

    2.1 Amount of income

    A person’s income for the purposes of Division 293 tax includes their income for surcharge purposes (disregarding their reportable superannuation contributions). This is similar to the income test used for determining whether a person is liable for the Medicare levy surcharge.

    Division 293 tax generally only applies to very high-income earners with low-tax contributions in an income year. That is why the Division 293 tax threshold has been set at $300,000. However, it may also apply to some people with more moderate income whose income exceeds the $300,000 threshold in a specific income year due to receipt of one-off additional income, such as a termination payment, or a large capital gains tax amount.

    Income for surcharge purposes is not related to the superannuation contributions surcharge.

    Income for surcharge purposes

    Income for surcharge purposes is a sum of the following:

    • a person’s taxable income, including the net amount on which family trust distribution tax has been paid
    • reportable super contributions
    • reportable fringe benefits amount reported on the payment summary
    • total net investment loss, which includes both net financial investment loss and net rental property loss
    • work-related compensation payments (for example, personal injury or wrongful dismissal) that are assessable as ordinary income
    • some components of employment termination payments (ETP)
    • some components of super lump sum payments.

    In July 2014, the government exempted from income for surcharge purposes the one-off increase in the capitalised value of a super benefit arising from the Fairer Indexation of Defence Force Retirement Benefits measure.

    Super lump sum payments

    A super lump sum taxed element with a zero tax rate is excluded from income for surcharge purposes. The taxed element of the taxable component of a super lump sum benefit, other than a death benefit, up to the low-rate cap amount for persons under 60 years old who have met their preservation age.

    Some lump sum payments received by a person could be fully or partly included or excluded from the income for surcharge purposes, depending on the:

    • nature
    • amount of the lump sum payment
    • age of the person
    • his or her years of service.

    The following super lump sum payments are also included in the income for surcharge purposes if an individual has met a condition of release, including:

    • compassionate grounds
    • severe financial hardship
    • permanent incapacity (also called a disability super benefit).

    The below table provides whether the components of super lump sums are included or excluded for income for surcharge purposes:

    Benefit type

    Included

    Excluded

    Benefit amount for a person below preservation age.

    Taxable component:

    • taxed element, and
    • untaxed elements.

     

    Tax-free component

    Benefit amount for a person between 55 and 59 years old.

    Taxable component:

    • taxed element above the low- rate cap, and
    • untaxed elements.

     

    Both:

     

    Benefit amount for a person 60 years old and over.

    Untaxed element.

    Both:

    • taxed elements, and
    • tax-free component.

     

    Benefit paid as a disability, compassionate grounds or severe financial hardship payment to a person under 55 years old.

    Taxable component:

    • taxed element, and
    • untaxed elements.

     

    Tax-free component.

    Benefit paid as a disability, compassionate grounds or severe financial hardship payment to a person 55 to 59 years old.

    Taxable component:

    • taxed element above the low-rate cap, and
    • untaxed elements.

     

    Both:

    • taxed element below the low-rate cap amount, and
    • tax-free component.

     

    Terminal medical condition.

    None.

    All components.

    Death benefit payment made to a non-dependant.

    Taxable component:

    • taxed element, and
    • untaxed elements.

     

    Tax-free component.

    Death benefit payment made to a dependant.

    None.

    All components.

    Employment termination payments

    According to section 82-130, an ETP is a payment made in consequence of the termination of the employee's employment, or to another person because of the death of the employee.

    The reasons for the termination of employment are not considered but can include:

    • age retirement
    • resignation
    • dismissal
    • termination due to death
    • redundancy.

    The following components of an ETP are essentially included in income for surcharge purposes:

    • any amount of a genuine redundancy payment (applying to people under 65 years old) above the tax-free cap
    • any amount of an early retirement scheme payment above the tax-free cap
    • full amount of life benefit termination payment, for example, golden handshake (any amount of the life benefit termination payment or invalidity payment that relates to employment before July 1983 is tax-free), and
    • any amount of an invalidity payment above the invalidity segment until a person’s last retirement day, which is generally when a person turns 65.

    Reportable superannuation contributions

    ‘Reportable superannuation contributions’ are also defined in section 995-1 and consist of:

    • reportable employer super contributions (for example, salary sacrificed contributions), and
    • personal super contributions for which an income tax deduction is claimed.

    For the purposes of the $300,000 threshold, reportable super contributions are disregarded from the calculation of income for surcharge purposes because they are already included in the calculation for low-tax contributions. This avoids double counting of those contributions.

    However, only those contributions that fall above the $300,000 threshold will be taxed – an additional amount of tax of 15% will be imposed on those concessionally taxed super contributions, including defined benefit contributions that exceed the $300,000 threshold.

    There are some exceptions to this rule in respect of certain Commonwealth judges and justices, and certain State higher level office holders.

    Example 2.1 Calculation of 'income' for surcharge purposes

    David’s tax agent lodges his 2013–14 income tax return, which shows the following amounts:

    • Salary and wages $230,000
    • Gross Interest $ 15,000
    • Dividend income $ 30,000
    • Total supplementary income $ 25,000 + 
    • Total assessable income $300,000
    • Total deductions $ 15,000 – 
    • = Total taxable income $285,000.

    He also has reportable fringe benefits of $30,000.

    • David’s income for surcharge purposes is calculated by:
    • Total taxable income $285,000
    • Reportable fringe benefits $ 30,000 + 
    • = $315,000.

    So, David’s income for surcharge purposes is $315,000.

    Supplementary income is reported in the Tax return for individuals (supplementary section).

    For the purposes of Division 293, any total net investment loss, such as a rental loss, are added back to determine the 'income for surcharge purposes.'

    Example 2.3 Calculation of 'income for surcharge purposes'

    Jason lodged his 2013–14 income tax return, which shows the following amounts:

    • Salary and wages $270,000
    • Gross interest $ 15,000
    • Super lump sum benefit $ 25,000 + 
    • = Total assessable income $310,000
    • Work-related deductions $ 10,000 -
    • Personal super contribution deduction $ 20,000 - 
    • Total taxable income $280,000.

    Jason is 58 years old and has reportable fringe benefits of $20,000. His super lump sum benefit consists of a taxed element that is below the low-rate cap, so is excluded from his income for surcharge purposes.

    Jason’s income for surcharge purposes is calculated by:

    • Total taxable income $280,000
    • Reportable fringe benefits $ 20,000
    • Personal super contribution deduction $ 20,000 + (which has been allowed as a deduction)
    • = $320,000.
    • His super lump benefit $ 25,000 - 
    • Income for surcharge purposes $295,000.

    So, Jason’s income for surcharge purposes is $295,000.

    For the purposes of Division 293, any total net investment loss, such as a rental loss, are added back to determine the 'income for surcharge purposes.'

    End of example

    2.2 Types of contributions

    The contributions that are counted for Division 293 tax purposes generally include:

    • employer contributed amounts
    • other family and friend contributions
    • assessable foreign fund amounts
    • assessable amounts transferred from reserves
    • defined benefit contributions (funded and unfunded)
    • personal contributions which are allowed as an income tax deduction.

    These contributions are concessionally taxed within the super fund. For this measure, they are known as ‘low-tax contributed amounts’.

    Excess concessional contributions do not attract a tax concession – so they are not included in contributions to which these changes apply.

    2.3 Constitutional issues

    Commonwealth judges and justices

    The Constitution requires justices and judges of the High Court, and of other courts created by the Parliament, to receive such remuneration as determined by the Parliament. This prevents the remuneration being reduced during their period in office.

    As outlined in section 293-190External Link, there were concerns that the imposition of Division 293 tax may in effect constitute a reduction of judicial remuneration in cases where certain defined benefit pension entitlements form part of their remuneration.

    As outlined in section 293-195External Link, the legislation giving effect to this measure does not impose Division 293 tax on the contributions in respect of defined benefit interests in a super fund established under the Judges’ Pensions Act 1968.

    State higher level office holders

    The High Court ruled that the Commonwealth could not impose the superannuation contributions tax (surcharge), under legislation that was enacted in 1997, on contributions to constitutionally protected funds (CPFs) for State higher level office holders.

    However, the Commonwealth has the power to impose the Division 293 tax on contributions made to a super interest in a CPF, where those contributions are salary packaged contributions made in respect of constitutionally protected State higher level office holders, as outlined in section 293-160External Link.

    Regulation 293-145.01External Link of the Income Tax Assessment Regulations 1997 (ITAR) specifies positions that constitute a ‘constitutionally protected State higher level office holder’ for the purposes of subsection 293-145(1)(b). These include:

    a) a Minister of the government of a State

    b) a member of the staff of a Minister of the government of a State

    c) the Governor of a State

    d) a member of staff of the Governor of a State

    e) a member of the Parliament of a State

    f) the Clerk of a house of the Parliament of a State

    g) the head of a Department of the Public Service of a State or a statutory office holder of equivalent seniority, including a statutory office holder who is the head of an instrumentality or agency of a State

    h) a judge, justice or magistrate of the court of a State.

    Contributions (including defined benefit contributions) that are not salary packaged contributions made to a CPF by a State on behalf of a constitutionally protected State higher level office holder are not subject to the Division 293 tax.

    The legislation imposes Division 293 tax on such salary packaged contributions made to an interest in a CPF, if those salary packaged contributions are taxable contributions for Division 293 tax purposes.

    The Tax Laws Amendment (2013 Measures No. 1) Regulation 2013 Explanatory Statement states:

    The regulation includes staff of Ministers as State higher level office holders, although not all of the staff of a Minister would necessarily qualify as being at the higher levels of government. However, given the nature of ministerial offices, it is unlikely staff who are not at the higher levels of government would exceed the income threshold for Division 293 tax to apply (broadly, $300,000 per annum including superannuation contributions).

    Consistent with case law, an individual will only be considered part of the staff of the Minister where they are directly employed by the Minister – merely being a member of the public service department for which the Minister is responsible is not sufficient. The regulation also includes both State Ministers and members of State Parliaments to ensure that a State Minister, who is not also a member of the State Parliament, is treated as a State higher level office holder.

    The regulation also refers to heads of departments and statutory officeholders of equivalent seniority. Statutory office holders of equivalent seniority include the holders of key governmental offices established under statute, such as Directors of Public Prosecutions, Chief Commissioners of Police, Solicitors-General, Auditors-General, Ombudsmen and Electoral Commissioners. It does not cover the heads of government-owned business enterprises or junior officials.

    Exercise 1

    Work it out

    Is the following statement true or false?

    The ‘Sustaining the super contribution concession measure’ will improve the fairness of the tax system. It will do by ensuring the tax concession received by people earning more than $300,000 is more closely aligned with the concession received by average income earners.

    Answer 1

    3. Calculation and imposition

    3.1 Liability to Division 293 tax

    3.2 Low-tax contributions

    3.3 Taxable contributions

    3.4 Calculating Division 293 tax

    3.5 Rate of Division 293 tax.

    The Superannuation (Sustaining the Superannuation Contribution Concession) Imposition Act 2013 imposes liability for Division 293 Tax on a person who has taxable contributions in an income year.

    3.1 Liability to Division 293 Tax

    In accordance with section 293-15External Link, a person is liable to pay Division 293 tax if they have taxable contributions for an income year.

    Under section 293-20External Link, a person will have taxable contributions for an income year if the sum of their income for surcharge purposes (less reportable super contributions) and low-tax contributions for the same income year exceeds $300,000.

    To determine whether a person is liable to pay Division 293 tax, the following variables need to be known:

    • income for surcharge purposes
    • low-tax contributions
    • taxable contributions.

    Income for surcharge purposes

    A person’s income for the purposes of Division 293 tax is similar to the income test used for determining whether a person is liable for the Medicare levy surcharge.

    3.2 Low-tax contributions

    To determine whether a person has taxable contributions for an income year, the amount of low-tax contributions for the corresponding income year must be established.

    The amount of low-tax contributions for an income year is defined in section 293-25External Link and it includes low-tax contributed amounts covered by section 293-30External Link for the income year, less excess concessional contributions for the income year (if any).

    Low-tax contributed amounts

    A contribution is covered by section 293-30 for an income year if it is:

    • made to a complying super fund in respect of a person
    • included in the assessable income of the fund, or by way of a rollover super benefit.

    Low-tax contributed amounts also include:

    • contributions to tax exempt CPFs that would otherwise be concessional contributions
    • contributions that would otherwise have been excluded under Subdivision 295-D
    • amounts allocated in relation to a complying super fund in accordance with conditions specified by the regulations made for the purpose of 
      subsection 291-25(3)External Link.

    Low-tax contributed amounts do not include:

    In the majority of cases, where a person only has an accumulation interest, low-tax contributed amounts for an income year will equal the amount of concessional contributions for the income year – that is, unless they also have excess concessional contributions for the income year.

    Low-tax contributions are concessionally taxed super contributions made on behalf of a person to an interest held by a super provider. Excess concessional contributions, while concessionally taxed in the super fund, attract extra tax and/or charges and lose their concessional status.

    The amount of low-tax contributions for an income year is worked out under the:

    • general rules that apply to a person with contributions made or amounts allocated to accumulation interests, and special rules that apply to      
      • people with defined benefit interests
      • certain State higher level office holders
      • certain Commonwealth justices and judges.
       

    Example 3.1 (Calculation of low-tax contributions)

    Maria’s only super interest is an accumulation interest.

    Concessional contributions made on Maria’s behalf to her super interest are $21,000 in the 2013–14 income year.

    Maria’s low-tax contributions are $21,000 – all of her concessional contributions.

    No further calculations are required to work out Maria’s low-tax contributions because Maria:

    • has only concessional contributions in respect of a super interest, which means that her low-tax contributed amounts equal her amount of concessional contributions, and
    • does not have excess concessional contributions.
    End of example
    Excess concessional contributions

    To calculate which contributions are the low-tax contributions, any contributions that would attract certain additional tax are subtracted from the low-tax contributed amount.

    For the 2012–13 income year, this includes subtracting any concessional contributions that are either:

    • subject to excess contributions tax (ECT), or
    • released under refund excess concessional contributions (RECC) as they are included in a person’s assessable income and taxed at their marginal tax rate.

    For the 2013–14 and later years, this includes subtracting any excess concessional contributions under the Fairer taxation of excess concessional contributions (FTECC) measure, because they are included in a person’s assessable income and taxed at their marginal tax rate.

    Exercise 2

    Get it done

    Select all that apply:

    A contribution is covered by section 293-30 for an income year if it is:

    (a) made to a complying super fund in respect of a person.

    (b) a non-concessional contribution.

    (c) included in the assessable income of the fund (or successor fund in the course of a rollover benefit).

    (d) a super co-contribution.

    (e) all of the above.

    Answer 2

    Exercise 3

    Work it out

    Is the following statement true or false?

    In working out the low-tax contributions, any amount of RECC is subtracted from the low-tax contributions amount.

    Answer 3

    3.3 Taxable contributions

    In accordance with section 293-20External Link, a person has taxable contributions for an income year if their combined income for surcharge purposes and low-tax contributions exceed $300,000.

    The amount of taxable contributions is the lesser of the:

    • amount of low-tax contributions, and
    • sum of income for surcharge purposes (less reportable super contributions) and low-tax contributions above the $300,000 threshold.

    This ensures that Division 293 tax applies to low-tax contributions only to the extent that they exceed the $300,000 threshold when added to income for surcharge purposes (other than reportable superannuation contributions).

    A person does not have taxable contributions for an income year if their low-tax contributions are nil.

    Both conditions of exceeding the $300,000 threshold and having low-tax contributions need to be met for Division 293 tax to be applied.

    Example 3.2

    For the 2013–14 income year, David had income for surcharge purposes of $315,000 and low-tax contributions of $25,000.

    The amount of taxable contributions is the lesser of either the:

    • amount of low-tax contributions, and $25,000, or
    • sum of income for surcharge purposes ($315,000) and low-tax contributions ($25,000) above the $300,000 threshold ($340,000-$300,000) = $40,000.

    So, the amount of David’s taxable contributions for the 2013–14 income year is $25,000 because it is the lesser of the two amounts.

    End of example

     

    Example 3.3

    During the 2013–14 income year, John had income for surcharge purposes of $290,000 and low-tax contributions of $15,000.

    John’s taxable contributions for the 2013–14 income year is the lesser of either the:

    • amount of low-tax contributions, and $15,000, or
    • sum of income for surcharge purposes ($290,000) and low-tax contributions ($15,000) above the $300,000 threshold ($305,000-$300,000) = $5,000.

    So, the amount of John’s taxable contributions for the 2013–14 income year is $5,000 because it is the lesser of the two amounts.

    End of example
      Last modified: 15 May 2015QC 43294