Division 293: The creeping tax on super that’s diminishing your retirement income

Article first published in The Australian 10 July 2021

If a government tinkers with superannuation, you can bet it’s going to stick.

Many will remember the key super changes that came about in the 2017 federal budget – the reduction in the concessional contributions cap to $25,000 and the introduction of the $1.6m pension cap being two significant limiters applied to the superannuation system at this time. Like most other super thresholds, these caps are indexed and will increase over time.

As the federal government’s Retirement Income Review came to a close late last year, and the increase of the super guarantee to 10 per cent kicked in earlier this month, superannuation continues to be a point of debate.

There’s a lesser-known tax on super, however, that’s eroding super balances, and not many people are talking about it. It’s called the Division 293 tax threshold and it lowered back in July 1, 2017, from $300,000 to $250,000.

Now unlike other thresholds, it’s not indexed. In what’s already another tax that diminishes people’s ability to self-fund their retirement, CPI and wage growth will increasingly see more Australians paying 30 per cent tax on their compulsory superannuation contributions as they move above this threshold.

The Division 293 tax is a 30 per cent upfront contributions tax applied on your taxable contributions when your income for a financial year exceeds the $250,000 threshold: Below that level the tax on upfront contributions is 15 per cent.

It may not seem like a large impost to those earning well above the threshold, but individuals just over the $250,000 threshold, or those that will reach the threshold in the coming years, will feel the pinch in their super balances, along with investment earnings forgone due to the tax.

Consider the example on the ATO’s website. It outlines Mark, who earned $320,000 in the 2020-21 financial year, with his compulsory employer contributions being $20,000 to super.

His super fund pays $3000 tax on his super fund’s contribution. With the Division 293 tax added, the tax paid on Mark’s super contributions is $6000. So, Mark has $14,000 of his $20,000 invested going forward.

The example compares his total superannuation tax bill of $6000 against the $9400 tax bill he would have paid if he had earned that $20,000 personally at a 47 per cent personal tax rate, stating the additional tax has reduced his tax concession to $3400. How is that comparison fair as Mark was required to make those superannuation contributions and he has no ability to access those funds for personal use?

The basis for the super changes introduced in 2017 was to bring “fairness” to the super system. But there is an obvious conflict in attempting to achieve fairness in a system where tax concessions are used as an incentive to build retirement capital and those on higher incomes are required to contribute more.

How does that reflect the policy intent of super, which is to help Australians self-fund their retirement?

Even though you may not normally have an income in excess of the $250,000 threshold, one-off events can also push your income up to this level. For example, you might receive a bonus, or you might sell an investment asset and make a capital gain, both of which would increase your taxable income for the year and may result in the 30 per cent tax rate being applied to your employer super contributions.

For years we’ve heard about Australia’s stagnant wage growth. It’s not a new issue in Australia and other developed countries. And while most salaries may be growing in line with CPI, a few more steps up the career ladder through promotions and career moves will see more Australians nearing an annual salary of $250,000.

Around 600,000 Australians earn more than $3000 (gross) per week. Anyone earning a low six-figure salary now could get caught by the Division 293 threshold in the next two to five years.

In Australia, we tax super contributions and fund investment earnings while retirement benefit payments are mostly exempt from tax.

The more common taxation approach implemented by most developed countries is to tax retirement benefit payments progressively as ordinary income based on an individual’s marginal tax rate. Contributions and fund earnings are, however, exempt from tax.

Exempting contributions and fund earnings from tax has significant compounding benefits over time.

While it is probably too late to redesign the basis on which our retirement system is taxed, the Division 293 tax could be removed on the basis that it would improve the capability of our system to produce good retirement outcomes.

At this time of year, as individuals and businesses go through their year-end tax planning processes, it’s a good time to look at your income and make sure you don’t just go over the Division 293 threshold.