62% tax savings on deductions

If your combined Div293 income + Div 293 super contributions is between $250k and less than $250k+(Taxable super contributions for Div 293 purposes) then any further deduction one can find can result in a 62% total tax saving. 47% + 15%.

Division 293 tax - information for individuals

 

Contributions that count for Div 293 are any concessional contributions. These include employer amounts and any employee amounts where they claim a deduction. defined benefit members may have notional contributions assessed instead of actual amounts.

Div 293 applies when taxable income + contributions exceed $250K. Then a further 15% tax on the contributions is imposed. Making increased super contributions to reduce taxable income is futile as one increases and another deceases by $1 for $1.

The income amount provides a guide
The components of this income calculation are:

• taxable income (assessable income minus allowable deductions)
• total reportable fringe benefits amounts
• net financial investment loss
• net rental property loss
• net amount on which family trust distribution tax has been paid
• super lump sum taxed elements with a zero tax rate
• assessable first home super saver released amount.

Given the items in italics are choices and produce a benefit any reduction is these may increase taxable income. Fairly futile eg buying a further IP to get a tax loss. Only genuine deductions may reduce taxable income and these are regressive eg $10,000 gift will be a cashoutflow of $10K to save perhaps 15% x $25,000

Div 293 is a effective $3750 maximum cost which as a % of total income of $250,000 as an example is an effective additional tax of 0.015%....Its not signiifcant to be honest. It may even be wise to chase a neg gearing benefit as this will outweigh the Div 293 cost. eg At 47% marginal tax rate a neg gearing loss of $7978 will outweigh the Div 293. But the neg gearing shouldnt be neg cashflow. Outthrwise you are spending cash to buy a trivial deduction benefit.

The carry forward cap is on one the few measures but it does involve extra super being preserved and the member would need to contribute say $25K from savings that becomes preserved to access personal tax benefit of $8000 and a potential Div 293 "maybe". For those who arent using their cap in full salalry sacrifice super may also assist to REDUCE DIv 293. Eliminate ? Hard to say.

CGT deferral is also another way to defer Div 293. CGT taxable profits increase taxable income and can push a employee into Div 293 as a one off. Its wise they consider deductible super to address tax. Div 293 is a lesser cost consequence.

 

Yeah, all else being equal, the 62% thing can be an incentive to help make the decision to buy work gear/equipment this year vs next year.

With instant asset write off, a $20k asset can mean only $7.6k cost or do that professional certification to add your skill set etc.

Carry forward cap is another example, $50k = $7.5k Div 293, a non trivial amount

Just to be clear, not advocating "buying deductions" for the sake of it. Just a different take on Div 293.

 

Div 293 does NOT produce a tax rate of 62%. That is far from correct. The marginal rate effect of Div 293 at best may be under 3% and is often 1-2%. Spending $$$ for deductions to save such a minor value is regressive. Spending $1 to obtain a 49c deduction benefit. However a taxpayer very close to the Div 293 threshold may benefit from dropping under the threshold through a deduction.

Taxpayer who pay Div 293 may also still have tax savings v those who dont maximise contributions. eg 17% of tax savings even after Div 293 is paid. (eg 47% less 30% total tax = 17% concession.

Instant asset write off applies up to $300 for individuals who are employees.

 

Homer had a good year, his income + super for Div 293 purposes is $275k and his taxable super contributions are $25k.

Homer is eyeing that promotion at work but all the cool kids have "latest-buzzword-cloud" certifications and he doesn't. The course + exam costs about $5k.

Based on numbers from pay calculator:
If he didn't want to do the course, his tax would be $91,917 (this includes the Div 293 tax which he can pay from his super but he prefers to leave his super as is), if he did do the course and claimed that deduction his tax would be $88,817, the difference being $3100 or 62% of $5000.

If Homer instead opted for an MBA at an overpriced university and the course fees are $50k and he wanted to pay it all this financial year then the first $25k will be at 62% tax saved and the next $25k will be at 47% tax saved

Deductions for the sake of deductions or pointless but with a bit of tax planning, he can indeed benefit from 62% - it's like a transient tax bracket that only exists when his combined Div293 income + Div 293 super contributions is between $250k and less than $250k+(Taxable super contributions for Div 293 purposes). Any more than that and he is back to his usual 47%.

Entertainment purposes only, not tax advice.

 

$50K for a MBA isnt that unusual. Or more. Lets put aside the issue with being unable to prepay a course fee. You can only pay per subject on enrolment due to Commonlwealth funding issues with tertiary institutions. Some will allow pre-enrolment up to 12 months (max) but many limit it to the next semester / trimester. Its a common question I get asked. But a large church donation may work...But giving $50K away to save $3750 seems a ...foolish idea really. The benefit of the "tax deduction" itself isnt a Div 293 saving startegy. It confuses two different issues.

Yes creating or bring forward expected tax deductions can assist to avoid Div 293. However tax issues can equally increase income so Div 293 is unexpected eg termination,, ETP, bonus, bonus taken as super, death benefit super from a adult parent or their estate, CGT amounts and emplyee eshare scheme amounts. Some of these are quite typical too for high income earners. I often see taxpayers with salalries of $200K exceed Div 293 when they have a bonus, sal sac fbt issues, employee share scheme income or a CGT event

Homers tax (incl medicare levy as this is a effective element of marginal rate) without doing any course is $99,917 + $3750 Div 293.
Homers tax doing the course ($5K fee) is $97,567 + $3750 Div 293.
The tax saving is $2350 being 47% x $5,000. theer is no Div 293 saving as D293 income exceeds the threshold still.

But lets say Homer donates $50K to the Church of Reverand Lovejoy. He may well save $23500 of primary tax and avoid $3750. A $27,250 tax saving for a $50K deduction. The marginal tax benefit is 54.50% not 62%
eg (23500+ 3750)/50000

Homer may have been wise to seek a fringe benefit that is otherwise deductible for the course that is not a reportable fringe benefit for the fees. This may reduce his income and yes it can be pre-sacrificed in one hit, not appear as a reportable benefit in any year and mean he reduces pre-tax income $50K possibly even meaning no Div 293 ($). But he didnt seek tax advice. Doing tax means the course cost to him is $22750. A 54.50% saving also

This example overlooks Homers salary sacrifice benefit which marginally reduces the apparent tax cost. It is unchanged in the comparisons

 

What if there was a HECS debt on top = 10% extra tax for ths too.

 

HELP debt wont occur if the fees are paid up front or by the employer and its otherwise deductible. Employers who support study can shift some issues and allow upfront fees rather than deferred. Just depends if the course is deduction eligible. Most FBT providers will ask for a tax agent sign off for the deductibility to use the "otherwise deductible" rule. This can also save them some $$ since fees are paid rather than deferred so the surcharge is also avoided. Doesnt apply to post grad and can vary 20-25%.

Yes a HELP debt can vastly change a taxpayer marginal tax rate by up to 10%. Unusual to see very high income earners commence post grad studies like that. When they do it is wise to get advice so that deductibility is addressed.

If using Help system fees cannot be prepaid other than forthcoming semester enrolment. Some uni's are also very slow at raising the charge for fees prior to census dates. I had somone plan a (large) deductible fee and the uni messed it up on them. They paid the uni in advance but uni didnt charge them. ATO deferred deductibility until the next year as it wasnt incurred. We argue enrolment created the debt which was a statutory charge but they defended that based on the census date allowed the taxpayer to withdraw and no charge would be incurred.

 

Not sure where you got the tax of $99,917 + $3750. My example was based on "income + super for Div 293 purposes is $275k and his taxable super contributions are $25k", I may not be using the right terminology when I said "taxable super contributions" but in a bit more detail below:

Taxable Income: $250k
Super: $25k
Income tax + Medicare Levy + Div 293 = $91,917

with a $5k deduction for his course
Taxable Income: $245k
Super: $25k
Income tax + Medicare Levy + Div 293 = $88,817

Difference being $3,100 on $5,000 = 62%

Yes, for a $50k deduction, $25k (his taxable super contributions for Div 293 purposes) is at 62% and $25k is 47%, averaged out is 54.5%

 

Conventional practice is taxable income is $X and super $Y. Not added as one element of income. I assumed convention. But thats an aside....
Anyway that after the $5k deduction your $88817 is incorrect.

with a $5k deduction for his course
Taxable Income: $245k
Super: $25k
Income tax + Medicare Levy + Div 293 = $89567 not $88817

$89567 is comprised primary tax and m/care of $88817 and $3750 Div 293. You reduced the contributions - They cant change.

Only primary tax changes at 47%.

This is why I am authorised by the ATO to perform tax estimates for taxpayers.

 

Did you mean some other number there? Those two don't add up to $89567
When you say "I reduced contributions" what do you mean please?

Paul, my follow up questions are for me to learn where and what I got wrong rather than questioning your expertise, far from it.

 

What you are saying makes perfect sense to me. We used this approach for my husbands return last year - $10k uni fees - save $4,700 income tax, $1,500 div 293. This would not have been possible other years as income was much more over $250k and hence the $10k uni fees would not have made difference in reducing Div293.

I think the conversation in this thread is over complicating things.

 

Eg
Taxable income $225k, super contribution $50k = Div 293 applied to $25k (225 + 50 - 250 = 25).

Taxable income $215k (due to $10k deduction), super contribution $50k = Div 293 applied to $15k (215 + 50 - 250 = 15).

Tax reduction of 62% (47% + 15%) on the deduction.

 

I'm a bit confused. Is it still not beneficial paying Div293 if your income is over $250k? Say someone earns $300k. They can either:

1. $300k taxable income paying 47% tax plus 2% medicare levy.

2. $250k taxable income paying 47% tax plus 2% medicare levy, contributing $50k to their super with carry-forward provisions being used. They pay 15% tax in their super fund on this $50k, and pay 15% Div 293 tax personally on this $50k as well. So in effect they get charged 30% tax all up, rather than paying 47% plus 2% medicare levy, saving them 19% tax on that $50k.

Is the above correct?

 

I don’t think anyone meant that paying Div 293 was not necessarily beneficial to them, but that in certain situations a reduction in income (eg through a deduction) results in a 63% tax reduction as it reduces Div 293 (15%) as well as income tax (47%). Hence it might be useful to bring forward deductions to that FY or contribute more to super to take advantage of the situation if your income and super contributions don’t normally result in this option being available.

 

Agree. Simple explanation = There is no 62% tax rate.

It is very unusual and rare to find a taxpayer with under $500K of super, capacity to make a $50k catch up contribution at all (and still have a high income job) and also make large deductible payments and then still bring assessable income under the threshold for Div 293. Personal tax planning is advised.

No. Simple answer.

 

Hmm, I think you're wrong Paul.

Div293 income plus Div293 super =

$245k + $25k = $270k.

Div293 taxable contributions are the lesser of the Div293 Super contribution ($25k) or the amount above the $250k threshold ($20k).

In this example, the Div293 amount payable is 15% of $20k, not $25k.

This is where the '62%' saving comes in. The total tax payable is $88817, being $85817 personal income tax plus medicare levy, plus $3000 Div293 tax.

 

Returning expats often have high incomes (often foreign income with no super as part of the package), spare cash, low super balances and unused caps.

 

I am having trouble understanding the Div 293, found out while doing online SMSF course.

Read few pages and examples on ATO and came here to get clarity but above discussion made me more confused!!

Current FY Cap- 27,500 and lets say we reach that by combining employer contribution and individual contribution to bring down the FY earnings.

Sale.of an IP results in income total income as $270K for the FY(excluding exempt amount CGT).

Plan is to put $330K in super using bring forward rule.

Does the div 293 will apply?

 

This would be non-concessional contributions I imagine
Div 293 applies to concessional contributions