How to Avoid Division 293 Tax: Practical Strategies for High-Income Earners in Australia
Many Australian investors find the difference between fully franked and unfranked dividends confusing, especially when it comes to how these dividends affect their income tax and tax return. Understanding these terms is important for making informed investment decisions and managing your actual tax payable.
Understanding Division 293 Tax and Why It Matters
Division 293 tax was introduced by the Australian Taxation Office to ensure that tax benefits from concessional super contributions are more fairly distributed, particularly among high income earners division. If your total income calculation-including salary, allowable deductions, reportable fringe benefits, and reportable superannuation contributions-plus your concessional super contributions (such as employer contributions and salary sacrifice contributions) exceeds the income threshold of $250,000, you may be assessed for this additional tax. The division 293 tax is calculated at 15% on the lesser of your taxable contributions or the amount by which your total income and super contributions exceed the threshold.
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Ways to Reduce Your Division 293 Tax Liability
While division 293 tax can’t always be avoided, there are several ways high income earners can reduce their exposure and make their superannuation contributions work harder for them. These strategies focus on managing your income, optimising your contributions, and making use of available caps and offsets.
Lower Your Taxable Income
Reducing your taxable income is one of the most effective ways to stay below the division 293 threshold. You can do this by claiming allowable deductions such as work-related expenses, charitable donations, or investment property losses (noting that net investment losses are added back for division 293 income calculation). If you’re expecting a capital gain or an eligible termination payment, consider the timing of these payments to avoid pushing your total income above the threshold in a single financial year.
Manage Your Concessional Contributions
Keep a close eye on your concessional contributions cap, which is $30,000 for the 2024–25 financial year. This includes employer contributions, salary sacrifice contributions, and personal deductible contributions. If your super contributions exceed the cap, you may face excess contributions tax on top of division 293 tax. Consider using the carry-forward rule to make larger contributions in years when your income is below the threshold, and reduce contributions in years when your income increases.
Consider Non-Concessional Contributions
Once you approach the division 293 threshold, switching to non-concessional (after-tax) contributions can help you continue to grow your super balance without triggering additional tax. These contributions don’t count towards your division 293 income or concessional contributions cap and can provide tax-free growth in your super account.
Timing Matters
If possible, align your superannuation contributions with years when your income is lower. For example, if you expect a one-off payment or a spike in income, you might delay or reduce your concessional contributions in that financial year. Similarly, you can negotiate with your employer to defer salary or bonuses to a later year to help manage your total income and avoid the division 293 threshold.
Defined Benefit Funds and Division 293
If you’re a member of a defined benefit fund, your division 293 liability is calculated differently. The notional contributions from your defined benefit are used in the income calculation, and the additional tax may be deferred until you receive your benefit. It’s important to check your notice of assessment and understand how your defined benefit is treated for division 293 purposes.
Getting Help and Staying Compliant
Navigating division 293 tax can be complex, especially with changing rules and multiple sources of income. The Australian Taxation Office provides resources on the ATO website, and you’ll receive a notice of assessment if you’re liable for division 293 tax. You may also need to complete an election form if you want to release money from your super fund to pay the extra tax.
Working with a trusted advisor can help you stay on top of your obligations, make the most of your tax concessions, and plan your superannuation contributions in line with your financial goals. At ACT Tax Group, we help high income earners and business owners understand their division 293 liability, manage their super contributions, and structure their finances for tax minimisation and retirement success.
Conclusion: Take Control of Your Division 293 Tax
Division 293 tax is an important consideration for high income earners making superannuation contributions in Australia. By understanding how your total income, concessional contributions, and super balance affect your liability, you can take practical steps to reduce your exposure to additional tax. Review your income and contributions each financial year, use your concessional contributions cap wisely, and seek expert advice to ensure you’re making the most of your tax benefits while staying compliant. If you have questions about your division 293 tax or want to discuss strategies for your situation, our team at ACT Tax Group is here to help you achieve peace of mind and financial growth.