Does making a personal deductible contribution affect the client's Division 293 tax liability?

Adviser Question:

My client has taxable income of $250,000 plus $10,000 of Superannuation Guarantee.  Their total Division 293 income is $260,000. If they make a personal deductible contribution of $20,000 using the carry forward provisions, will they pay a higher amount of Division 293 tax?

Answer:

In this particular scenario, making a $20,000 personal deductible contribution will not increase the amount of Division 293 tax payable.

An individual’s Division 293 tax liability is not just determined by the amount of concessional contributions they have made for the year, but also on their level of income for Division 293 purposes.

Income for Division 293 purposes does not change due to an individual making a personal deductible contribution to super. Therefore, there may be instances where making a personal deductible contribution does not increase their Division 293 tax liability.

Further explanation:

Division 293 tax of 15% is applied to the lesser of:

a)  Division 293 income that exceeds the threshold (currently $250,000), or

b)  Low tax contributions for the year

a)  Division 293 income includes:

• Taxable income (i.e.assessable income less tax deductions)
• Amounts on which family trust distribution tax has been paid
• Reportable fringe benefits
• Total net investment losses
• Low tax contributions (i.e. generally concessional contributions which do not result in an excess concessional contributions determination)

Less any taxable component (taxed element) of a lump sum withdrawal that is within the individual’s low-rate cap (not applicable from 2024-25 onwards)

Less any assessable amounts released under the First Home Super Saver scheme

b)  Low tax contributions

Low tax contributions are concessional contributions, which do not result in an excess concessional contributions determination.

How do personal deductible contributions impact Division 293 income?

When a client makes a personal deductible contribution, it increases the clients low tax contributions for the year, therefore you would be forgiven for thinking that their Division 293 income is also increased. 

However as ‘taxable income’ is calculated as assessable income minus tax deductions, when a client receives a tax deduction for a personal deductible contribution it reduces their taxable income accordingly.

Taxable income = Assessable income – tax deductions

In other words, the deduction for the personal deductible contribution reduces taxable income but is added back when determining Division 293 income by increasing the amount of low tax contributions.  The net result is that the amount of Division 293 income is unchanged.

How is Division 293 tax calculated?

Division 293 tax of 15% is applied to the lesser of:

a)  Division 293 income that exceeds the threshold (currently $250,000), or

b)  Low tax contributions for the year

it is important to always compare these two figures to determine the Division 293 tax liability.

Answer to adviser question

The table below compares the amount of Division 293 tax payable before and after making a $20,000 personal deductible contribution:

As you can see from this table, the client pays Division 293 tax of $1,500 irrespective of whether they make a personal deductible contribution of $20,000 or not.  This is because the Division 293 income less $250,000 ($10,000) is less than the amount of low tax contributions ($30,000).  Therefore Division 293 tax is calculated on Division 293 income less $250,000 ($10,000).

Are there situations where making a personal deductible contribution increases the amount of Division 293 tax payable?

Yes.  If the client’s Division 293 income less $250,000, is a higher amount than their low tax contributions, then increasing low tax contributions by making a personal deductible contribution will result in a higher Division 293 tax liability.

For example, Trevor sells an investment property resulting in total taxable income for the year of $400,000. He has no other income for the year and no SG contributions. Trevor’s financial adviser is considering whether Trevor should make a personal deductible contribution of $100,000 by using his carry forward unused concessional contributions[1].

Without the $100,000 personal deductible contribution, Trevor’s Division 293 income equals his taxable income of $400,000. Because he doesn’t have any low tax contributions, he’s not liable to pay Division 293 tax.

On the other hand, if Trevor makes a $100,000 personal deductible contribution, the deduction for the personal super contribution reduces his taxable income, but is added back to his Division 293 income by increasing the amount of low tax contributions.  The net result is that the amount of Division 293 income is unchanged at $400,000 but Trevor is liable to pay Division 293 tax.

Given that Trevor’s low tax contributions are $100,000 if he makes a personal deductible contribution, and this is less than $150,000 (i.e. the extent that Trevor’s Division 293 income of $400,000 exceeds the $250,000 threshold), making the personal deductible contribution will increase his Division 293 tax liability from $0 to $15,000 (i.e. 15% of $100,000).

[1] Assuming Trevor’s total super balance is under $500,000 at the previous 30 June 

Is making a personal deductible contribution worthwhile if Division 293 tax is payable?

Division 293 tax reduces the tax effectiveness of personal deductible contribution strategies, compared to a hypothetical strategy involving no Division 293 tax applying.

However, a personal deductible contribution strategy is still tax effective as the contribution is taxed at 30% instead of the highest marginal tax rate (47% including Medicare levy) that applies to almost all clients subject to Division 293 tax.

For more information on Division 293 tax, see the FirstTech Super and Retirement Income Streams Guide.