Contributions where a tax deduction has been claimed are referred to as Concessional Contributions.
The types of contributions that are assessed as Concessional Contributions include salary sacrifice contributions, employer contributions and personal deductible contributions.
In some cases, contributions tax on concessional contributions can be as high as 30%.
This is something that needs to be considered when determining the benefit of making additional tax deductible contributions into superannuation.
It may even be something that you take into account when negotiating a salary package.
What is the standard tax on concessional contributions?
In most cases, the tax rate on concessional contributions will be a flat 15%.
For example, if you are an employee and have a salary of $60,000 p.a. and your employer makes mandatory superannuation guarantee (SG) contributions into your superannuation account for you, at the current required rate of 9.5%, then they would need to contribute $5,700 p.a. into superannuation for you – in addition to the salary that is paid into your personal bank account.
However, of the $5,700 that they pay into your account, only $4,845 would actually be paid into your super account, because superannuation contributions tax of 15% would be deducted first.
The reason that superannuation contributions tax is deducted from this contribution is because it is a Concessional Contribution.
The reason SG Contributions are assessed as a Concessional Contribution is because your employer claims a tax deduction for the contribution.
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If you are a self-employed person earning $60,000 p.a., you obviously do not receive employer contributions.
Instead you are able to choose whether or not you make any contributions to superannuation.
If you do decide to make personal deductible contributions, which is a form of Concessional Contribution, these contributions will also incur contributions tax.
30% Tax On Super Contributions
So, who will get slugged with a 30% tax on their superannuation contributions?…. and why?… and when?
A new tax, known as the Division 293 tax, was introduced in the 2012-13 financial year.
The government saw a disparity between the tax benefits received by a high-income earner compared to us everyday folk when making salary sacrifice contributions or personal concessional contributions.
You see, if someone earning $80,000 makes salary sacrifice contributions into superannuation, they are essentially reducing the tax on the amount sacrificed by 19.5% – the current difference between their highest marginal tax rate (plus medicare) (34.5%) and the superannuation contributions tax rate of 15%.
However if, without the application of Division 293, a person earning $350,000 p.a. makes salary sacrifice contributions into superannuation, they are essentially reducing the tax on the amount sacrificed by 32% – the current difference between their highest marginal tax rate (plus medicare and budget repair levy) (47%) and the superannuation contributions tax rate of 15%.
As you can see, the higher income earner receives a greater tax benefit and, arguably, is less likely to need it.
Application of Division 293 and 30% Tax
Therefore, the Government announced the Division 293 Tax which, as of 2012/13, reduced this effective tax concession for individuals earning more than $300,000 p.a.
This is achieved by applying up to an additional 15% contributions tax to individuals earning more than $300,000 – meaning such individuals can actually pay 30% contributions tax in total.
But, if you’re one of these high-rollers who have managed to sneak under the $300,000 threshold, don’t be so quick to laugh.
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30% Tax On Super Contributions – Post 1 July 2017
As of 1 July 2017, the Division 293 Tax high income threshold was reduced from $300,000 down to $250,000.
And don’t think you can salary sacrifice your way out of the tax; because your income, when assessing the Division 293 Tax, disregards any reportable superannuation contributions and includes all low-tax super contributions.
This basically means that salary sacrifice contributions are added back to your taxable income and that is the figure used to see if you exceed the threshold. Click here for the income test.
The amount on which the Division 293 tax is calculated on is the lesser of:
- Income for division 293 purposes, minus the $250,000 threshold; and
- Total low tax contributions
Division 293 Formula
The Division 293 calculation is made by applying the following formula:
Division 293 Tax (15%) is payable on the lesser of:
- The amount of total concessional contributions; and
- The amount of income, plus Div 293 concessional contributions, that exceed the Div 293 threshold ($250,000)
Division 293 Tax Example
If Graham had a taxable income of $255,000 in the 2018/19 financial year and his employer had made mandatory employer SG contributions of $20,531 into his super account (capped due to the maximum super contribution base); Graham’s SG contributions would incur the standard 15% contributions tax, plus the additional 15% Division 293 tax, as his income of $255,000 classifies him as a high-income earner.
Therefore, in total, he would be liable to pay Divsion 293 tax:
Total Div 293 tax = $20,531 (total concessional contributions) x 15% Division 293 tax
Total Div 293 tax = $3,080
Total alternate Div 293 tax = $255,000 + $20,531 – $250,000 = $25,531
Total alternate Div 293 = $3,830
Therefore, as the first caluclation provides the lower Div 293 tax, then this is the Div 293 tax that is applied.
Net contribution paid into super account = $20,531 – $3,080 (standard contributions tax) – $3,080 (Division 293 tax)
Net contribution paid into super account = $14,371
Let’s say Susan had a taxable income of $287,000 consisting of an employment salary of $266,000 (after salary sacrificing $4,000 to super) plus share dividends of $21,000 and her employer had made SGC contributions of $20,531 (again due to the maximum super contribution base). She had no other tax deductions.
Susan’s income for surcharge purposes would be $291,000 for Division 293 purposes, despite her taxable income being only $287,000, as the salary sacrifice contributions are reportable employer contributions and are added back to her taxable income.
Having an income for surcharge purposes over $250,000 means that Susan’s contributions are subject to the standard contributions tax, plus the Division 293 tax.
Because her income for surcharge purposes exceeding the Division 293 income threshold is greater than the low-tax contributions made, the Division 293 tax will be payable on the total contributions made.
Therefore she would pay a total of 30% tax on super contributions.
The Division 293 tax will apply to all concessional contributions, which includes employer SG contributions and salary sacrifice contributions.
Total tax on contributions = ($20,531 + $4,000) x 15% contributions tax x 15% Division 293 tax
Total tax on contributions = $7,359
Net contribution paid into super account = $24,531 – $7,359
Net contribution paid into super account = $17,172
After-Tax Super Contributions
After-tax or post-tax super contributions are non-concessional contributions. Non-concessional contributions are not subject to contributions tax of the Division 293 tax.
All non-concessional contributions enter and exit a super account tax free,
A tax deduction is unable to claimed for non-concessional contributions.