Division 293: The Tax Bill That Arrives After You've Already Paid Your Tax

Mia: Welcome to the podcast, our newsletter made easy. Please note, this podcast features AI-generated voices for your hosts, Mia Taylor Leo: and Leo Baker, bringing you expert insights from the team at Aevum Accounting. Each week, we're here to help you confidently navigate the ins and outs of Australian tax, whether it's for your individual finances or the complexities of your business. Mia: We'll cut through the jargon to give you strategies for compliance, smart planning, and that ultimate peace of mind. Leo: So, if you're looking to understand your obligations, maximise your financial position, or simply gain clarity on your money matters, you're in the right place. Let's get started with our review of the week! Mia: This one comes from Katrina, who has been with the team for three years now. She says: I primarily use the service at tax time, but they have provided advice throughout the year, which has been incredibly valuable. Leo: Thank you, Katrina. And advice throughout the year is exactly the right note to open on today, because today's topic is one that people almost always find out about too late. Mia: Too late meaning what, exactly? Leo: Meaning the letter arrives, they've already lodged, they've already been assessed, they've already paid. And then a second, completely separate bill turns up with a number on it they weren't expecting. Mia: That sounds like a mistake. Leo: It isn't. It's Division 293. Mia: Which, I'll be honest, I would have guessed was the one we covered a couple of weeks ago. Leo: A lot of people would, so let's clear that up now. Division 296 is the three million dollar super tax, from Episode 53. This is Division 293. Different number, different trigger. Mia: So what's the trigger here? Leo: Income. Specifically, if your income plus your super contributions goes over two hundred and fifty thousand dollars in a year, the government takes back some of the tax break you got on those contributions. Mia: Takes back how? Leo: An extra fifteen per cent tax on some or all of your concessional contributions. On top of the fifteen per cent your fund already paid. Mia: So thirty per cent instead of fifteen. Leo: On the portion that's caught, yes. And to walk through how that actually works, because the mechanics are where everyone goes wrong, we've got Harvey Green back with us. Harvey, welcome. Harvey: Good to be here. And I'd say this is probably the single most misunderstood assessment the tax office issues, because it arrives separately from everything else. People assume it's an error. Mia: Harvey, start with the obvious one. Two hundred and fifty thousand dollars. Is that salary? Harvey: No, and that's the first trap. It is not your salary, and it is not even your taxable income. Division 293 uses a deliberately broader measure. Mia: Broader how? Harvey: Start with your taxable income. Then add your total reportable fringe benefits, any net financial investment loss, any net rental property loss, and any amount you've paid family trust distribution tax on. Then two things come back off: super lump sums that were taxed at a zero rate, and any First Home Super Saver amount released to you. Mia: That's a longer list than most people would expect. Harvey: It is, and the length is the point. That total is what the tax office calls your Division 293 income. Then your concessional contributions get added on top of it, and that combined figure is what's tested against two hundred and fifty thousand. Leo: So the contributions are counted twice, in a sense. They're what pushes you over the line, and they're also what gets taxed. Harvey: That's exactly right, and it catches people. Someone on two hundred and thirty thousand dollars of salary thinks they're comfortably under. But add the employer contributions on top and they're over. Mia: What about someone who's negatively geared? Harvey: Then the net rental loss gets added back for this test. So you can have a property running at a loss, which reduces your taxable income, and still find yourself above the Division 293 line. Those two numbers move in opposite directions and people find that genuinely counterintuitive. Mia: And salary packaging? Harvey: Same thing. The grossed-up value of reportable fringe benefits counts. So a novated lease, or packaged benefits through a hospital or a charity, can lift you over a threshold you thought you were nowhere near. Leo: And there's no discount for the hospital and charity crowd here, is there. Harvey: No, and that surprises people. There's a concession that reduces the reportable amount for things like family assistance. It does not apply to Division 293. The full grossed-up figure counts. Leo: Harvey, this is the part I think listeners should really sit with. That two hundred and fifty thousand dollar figure has not moved since the first of July, twenty seventeen. Harvey: Nine years. And there is no indexation mechanism in the legislation at all. It isn't that indexation has been paused. There is simply no mechanism. Mia: So every year, wages go up, and the line stays exactly where it is. Harvey: Correct. Which means a tax that was designed for a small group of very high earners keeps reaching further down each year. People who do not think of themselves as high earners are now getting these assessments. Leo: And nothing has been announced to change that. We checked. Harvey: Nothing. It sits where it was put in twenty seventeen. It survived the twenty twenty-six tax reform package untouched, and it isn't on the announced-but-not-yet-law list either. Mia: Okay. So let's do the maths. If I'm over the line, do I pay the extra fifteen per cent on everything? Harvey: No. And this is the single most important thing in the episode, because most people assume yes, and they overestimate the bill badly. Mia: Okay, walk me through it. Harvey: The extra fifteen per cent applies to the lesser of two numbers. Either the amount you went over two hundred and fifty thousand by, or your concessional contributions for the year. Whichever is smaller. Leo: So if you only just cross the line, you only pay on the small amount you crossed by. Harvey: Precisely. Let me use the tax office's own example. Someone with Division 293 income of two hundred and forty thousand dollars, and fifteen thousand dollars of contributions. Together that's two hundred and fifty-five thousand. Mia: So five thousand over. Harvey: Five thousand over. Now compare that to the contributions, fifteen thousand. The lesser of the two is five thousand. So the tax is fifteen per cent of five thousand dollars. Seven hundred and fifty dollars. Mia: Not fifteen per cent of the fifteen thousand. Harvey: No. And that difference matters enormously. Fifteen per cent of fifteen thousand would be two thousand, two hundred and fifty. The actual bill is seven hundred and fifty. People budget for the wrong one. Leo: Let's do one that's a bit further over. And these next ones are ours, not the tax office's, using this year's numbers. Harvey: Take someone with income of two hundred and thirty-five thousand dollars and the full concessional cap of thirty-two thousand, five hundred. That's two hundred and sixty-seven thousand, five hundred in total. Mia: Seventeen and a half thousand over. Harvey: Seventeen thousand, five hundred over. Contributions are thirty-two thousand, five hundred. The lesser is the seventeen and a half. So the tax is two thousand, six hundred and twenty-five dollars. Leo: And at the top end? Harvey: Once you're well clear of the threshold, the contributions become the smaller number, and that's your ceiling. Someone on two hundred and eighty thousand dollars with the full cap pays fifteen per cent of thirty-two thousand, five hundred. Four thousand, eight hundred and seventy-five dollars. Mia: And that's the most anyone can pay? Harvey: At the standard cap, yes. Four thousand, eight hundred and seventy-five dollars is the ceiling, and you only actually reach it once your income and contributions together clear two hundred and eighty-two thousand, five hundred. Below that you're taxed on the excess, not the whole contribution. Leo: Any exceptions to that ceiling? Harvey: One that matters. If you're using catch-up contributions from unused cap in earlier years, the tax office counts every dollar inside that bigger cap. So someone making a large catch-up contribution can pay a multiple of four thousand, eight hundred and seventy-five. That's worth modelling before you make the contribution, not after. Leo: And the cap itself went up this year, didn't it. Harvey: It did, and quietly. The concessional cap rose on the first of July, twenty twenty-six, from thirty thousand dollars to thirty-two thousand, five hundred. Nobody announced it, because nobody has to. It's automatic indexation to average weekly earnings, rounded down to the nearest two thousand five hundred, and it flowed through once the Bureau of Statistics published the November figures in February. Mia: And the flow-on? Harvey: You can put more in, which is good news. But it also lifts the maximum Division 293 bill from four thousand, five hundred to four thousand, eight hundred and seventy-five. Mia: So the cap going up is a small win and a small sting at the same time. Harvey: Neatly put. Yes. Leo: There's one more thing about that cap worth saying out loud, isn't there. Harvey: There is, and it's the part high earners find frustrating. The maximum contributions base for this year is two hundred and seventy thousand, eight hundred and thirty dollars, and it's deliberately set so that twelve per cent super guarantee on it comes to exactly thirty-two thousand, five hundred. Leo: Which is the whole cap. Harvey: Which is the whole cap. So if you earn more than about two hundred and seventy-one thousand, your employer's compulsory super has already used every dollar of your concessional cap. There's nothing left to salary sacrifice, and you'll be paying Division 293 on contributions you never chose to make. Mia: Harvey, what about someone who is normally well under, and has one unusual year? Harvey: That is the most common way people get caught by surprise, and it's worth spelling out properly, because there's a lot of bad information about this one. Leo: Start with redundancy, because that's the one people ask about. Harvey: And redundancy is the one people get wrong. The tax-free part of a genuine redundancy is not assessable income at all, so it never touches the Division 293 test. This year that tax-free limit is thirteen thousand, five hundred and ninety-eight dollars, plus six thousand, eight hundred and one dollars for every completed year of service. Mia: So a sixty thousand dollar payout after five years? Harvey: Five years gives you a tax-free limit of forty-seven thousand, six hundred and three dollars. So only about twelve thousand, four hundred of that payout counts. Someone on two hundred thousand goes to roughly two hundred and twelve thousand, adds their contributions, and is still under the line. Mia: So the redundancy itself often isn't the problem. Harvey: Often it isn't. What tips people over is what comes with it. The taxable part of the termination payment above that limit counts at its full face value, and so do your unused annual leave and long service leave payouts. Someone with short service and a big leave balance can clear the line easily. Leo: And a bonus, or selling an investment property? Harvey: Those are simpler, and more dangerous, because there's no tax-free slice to shelter you. Take someone on two hundred thousand who makes a sixty thousand dollar capital gain selling a rental. That's two hundred and sixty thousand. Add thirty-two thousand, five hundred of contributions and they're at two hundred and ninety-two thousand, five hundred. Mia: Forty-two and a half thousand over. Harvey: Forty-two thousand, five hundred over, and contributions of thirty-two thousand, five hundred. The lesser is the contributions. So four thousand, eight hundred and seventy-five dollars of Division 293 tax, in a year they were not expecting one. Mia: And there's no relief for it being a one-off? Harvey: None. There's no averaging, no smoothing, no discretion. The tax office openly lists termination payments, back pay and capital gains as reasons you might get an assessment one year and never again. It is entirely predictable if someone looks at it in advance. That's the whole argument for having the conversation during the year rather than after. Leo: Which brings us to the part that costs people real money. How you actually pay it. Harvey: There are two options. You can pay it personally, out of your own pocket. Or you can elect to have it released from your super fund, which is what most people do, because the money that triggered it is sitting in super anyway. Mia: And how do you elect? Harvey: Through ATO online services. Super, then Manage, then Division 293 election. Your tax agent can do it for you, and there are paper forms if you need them. You have sixty days from the issue date on the assessment to make that election. Leo: And one thing about that election people should know before they make it. Harvey: It's irrevocable. Once it's lodged you cannot withdraw it or reverse it. So decide properly the first time. Leo: And here is the trap. Harvey: Here is the trap. Those sixty days do not extend your payment due date. People read sixty days and hear you've got sixty days to pay. You do not. The due date printed on the assessment is the due date, full stop. The sixty days is only the window to choose where the money comes from. Mia: So you could be doing everything right, working through your sixty days, and still be late. Harvey: And accruing general interest charge. Yes. The tax office says it twice on its own page, which tells you how often people get it wrong. It's an easy, avoidable mistake and we see it. Leo: Harvey, there's a second one here that's more serious, isn't there. Harvey: There is, and this one has real consequences. If you have a self-managed fund and you decide to pay from super, you must wait for the tax office to issue the official release authority before any money leaves the fund. Mia: What happens if you don't wait? Harvey: Then it isn't a Division 293 payment. It's a contravention, and it's treated as illegal early access to superannuation. The amount goes into the member's assessable income, there's tax shortfall penalties and interest on top, you can't put the money back, and trustees can be disqualified. Disqualifications are published on the Federal Register of Legislation, so it isn't a quiet outcome either. Mia: So the trustee who's being organised and getting ahead of it is the one who gets punished. Harvey: Unfortunately that is exactly the profile of the person who gets caught. Wait for the release authority. Every time. And once it arrives, the fund has ten business days to pay it and return the statement. Leo: And there's a category of people who don't pay it now at all. Harvey: Yes, and this one is worth knowing if it applies to you. If your Division 293 tax relates to a defined benefit interest, you generally don't pay it at the time. The tax office holds it in a debt account against your name. It happens automatically, you don't apply for it. Mia: A debt account. That sounds like it grows. Harvey: It does, but not the way people picture it. It isn't daily interest like an ordinary tax debt. If the account is still in debit at thirty June, the tax office adds interest for that year at the average ten-year Treasury bond rate. That was 4.6148 per cent for twenty twenty-five, twenty-six. Mia: And you're stuck with it? Harvey: No, and this is the useful part. You can voluntarily pay it down before thirty June and avoid that year's interest completely. Otherwise it's settled when the benefit is eventually paid out of the fund, and the discharge amount is due twenty-one days after that. Leo: So there are people walking around right now with a Division 293 debt quietly building up. Harvey: There are, and many of them don't think about it. The tax office does send a statement of account every time the balance changes, so the information is there. It just arrives years before it matters, and people file it and forget it. Mia: Who's most likely to be in that position? Harvey: It has less to do with your employer's sector than people assume. It turns on holding a defined benefit interest you can't access. In practice that's the public sector defined benefit schemes, military schemes, and the defined benefit divisions that still exist inside some funds. If you're in one, it's genuinely worth checking what's sitting in that account. Mia: What about judges? I'd have assumed they were squarely in this group. Harvey: Funny you say that, because judges are closer to the opposite case. Contributions to a constitutionally protected fund are generally excluded from Division 293 altogether, and justices and judges under the Judges' Pensions Act scheme are specifically exempt. They're one of the few groups the tax mostly steps around. Mia: Okay. Harvey, after all of that, I have to ask the obvious question. Is putting money into super still worth it if I'm going to get taxed thirty per cent on it? Harvey: It is, and I want to be very clear about this, because the headline of this episode could easily push someone into a bad decision. Mia: Let's hear it. Harvey: If you are over the Division 293 threshold, your marginal rate is almost certainly forty-five per cent plus the two per cent Medicare levy. Forty-seven per cent. That is the alternative. Leo: So thirty versus forty-seven. Harvey: Thirty versus forty-seven. Seventeen percentage points in your favour. Take the full cap of thirty-two thousand, five hundred dollars. Taken as salary at forty-seven per cent, you keep seventeen thousand, two hundred and twenty-five dollars. Mia: And through super? Harvey: Fifteen per cent contributions tax plus fifteen per cent Division 293 is thirty per cent, so twenty-two thousand, seven hundred and fifty dollars lands in the fund. Mia: That's over five thousand dollars better off. Harvey: Five thousand, five hundred and twenty-five dollars better off, on that one year's contributions. Division 293 reduces the benefit of super. It does not remove it. Stopping your salary sacrifice because of this tax usually makes you worse off, not better. Leo: Is forty-seven per cent always the right comparison? Harvey: Not always, and it cuts both ways. The top rate starts at a hundred and ninety thousand and one dollars of taxable income, so on a straight salary you're well inside it by the time Division 293 bites. But if your Division 293 income is inflated by reportable fringe benefits or a rental loss, your taxable income can sit in the thirty-seven per cent bracket while your Division 293 income is over the line. Then the gap is smaller. Leo: And the other way? Harvey: If you don't hold private hospital cover you're also paying Medicare levy surcharge, so it's forty-eight and a half per cent, not forty-seven, and the saving is bigger than the number I just gave you. Harvey: But the headline holds either way. This is a smaller discount, not a penalty for using super. Mia: Harvey, one more. What's the relationship between this and the one we covered in Episode 53? Harvey: They're completely separate, and you can pay both. Division 293 is about your income in a year and taxes contributions going in. Division 296 is about your total super balance and taxes earnings attributable to the balance above the threshold. Leo: And that threshold is three million. Harvey: Three million for the first tier, with an extra fifteen per cent. There's a second tier at ten million with a further ten per cent on top. Both are indexed to CPI, which is a detail a lot of people miss because the original twenty twenty-three design had no indexation at all. Leo: So a high earner with a large balance could get two separate assessments. Harvey: They could, and increasingly some will. One is triggered by what you earn. The other by what you've accumulated. Neither one tells you anything about the other, and nothing offsets one against the other. Mia: When do the first Division 296 assessments actually turn up? Harvey: Not for a while. The first year is this one, twenty twenty-six, twenty-seven, but assessments won't begin issuing until the second half of twenty twenty-seven, twenty-eight. Mia: Alright, practical close. The letter arrives. What do I actually do? Harvey: First, don't assume it's wrong. It almost never is. Second, check the income figure on it against what you expected, because if you had reportable fringe benefits or an investment loss, that's usually where the surprise came from. Leo: And then? Harvey: Then decide, deliberately, whether you're paying personally or from super, and note the actual due date, not the sixty day election window. Remember the election can't be undone. And if it's a self-managed fund, wait for the release authority. Mia: And if I think I might be heading for one next year? Harvey: Then that's a conversation to have now, while you can still do something about it. If you're near the line and you're expecting a bonus, a redundancy or a property sale, the timing of that is worth planning around. Leo: Which is exactly what Katrina was describing at the top of the episode. Harvey: It is. Advice during the year is worth considerably more than an explanation afterwards. Mia: Harvey, thank you. That was genuinely useful. Harvey: My pleasure. And if anyone listening is unsure whether this applies to them, the team at Aevum Accounting can work it out in about ten minutes from your payment summary. Mia: So let's recap. Division 293 is an extra fifteen per cent on your concessional contributions once your income and contributions together pass two hundred and fifty thousand dollars. Leo: That threshold hasn't moved since twenty seventeen and has no indexation, so it catches more people every year. Mia: The extra tax applies to the lesser of the amount you went over by, or your contributions. So crossing the line by a little costs you a little. Leo: At the standard cap, the most you'll pay this year is four thousand, eight hundred and seventy-five dollars. Catch-up contributions can push it well past that. Mia: Your sixty days to elect to pay from super does not extend the due date on the assessment, and the election can't be reversed. Leo: If it's a self-managed fund, wait for the release authority. Paying early is treated as illegal early access. Mia: Defined benefit members don't pay now, but a debt account picks up interest every thirty June unless you pay it down. Leo: And even at thirty per cent, salary sacrifice still beats taking it as income at forty-seven. Don't stop contributing because of this. Mia: If you want to know whether this is coming for you, head to aevumaccounting.com.au and book a session with the team. Leo: Or head to Aevum Accounting at aevumaccounting.com.au and we'll take a look at your numbers before the letter arrives, not after. Mia: Before we go, a quick but important reminder. The information shared today is for general informational purposes only, and does not constitute specific tax or financial advice. Leo: Everyone's situation is unique, and tax laws are complex. For personalised advice tailored to your situation, we always recommend consulting with a qualified professional. Mia: Until next time, stay savvy, stay proactive... Leo: And don't stop your salary sacrifice over it!