93% effective tax rate... the Superannuation trap

Until relatively recently, I had been oblivious to some of the utterly jaw dropping Superannuation taxation traps that can cause some income to be effectively taxed at 93%..... yes, Ninety Three.....

Excess Contributions Tax learner guide

Anyone that has also been in the unfortunate situation of receiving a Division 293 tax bill will probably know this but for most others, you're likely to be oblivious of the issue until it stings you..... and sting you it probably will even if only in the year you retire....

The compounding issue of Concessional versus Non-concessional contributions with income above 300k (soon to be lowered to 250k) can actually mean for some that additional super contributions may potentially be a very bad idea.....

Does anyone have any strategies to either reduce or eliminate falling into this taxation farce???

 

Its quite simple and requires little effort.

Dont breach NCC or CC caps. To achieve the 93% tax you would have to max out and exceed both caps in one year. Can be done under the bring forward rule and other such lumpy amounts. One of the reasons why I strongly suggest all people who want to add lumpy amounts to super get personal advice. I often see people proposing very silly ideas that their mate, brother, friend etc says is OK. eg : My brother in law will employ me in his company so I can make two lots of concessional caps....Wrong.

Div 293 tax is a extra 15% tax on employer super contributions. To a total of 30%. The reasoning is that higher income earners are salary sacrificing extra $ to super and so a clawback of the tax saving halves their benefit. For a top tax rate earner they still get a benefit of 17%

PS The 93% was under the old rules and can be less now.

The $1.6m cap is now also a consideration.
The changed bring forward rules also may cause some to blow caps

 

It's it a ridiculously large amount of money to be caught by this rule? In the example given, Arthur's non-concessional contributions for the year total $480,000. I would suggest if you have $480k to dump into super in one year then you have quite enough money to pay for some personal tax advice. With personal tax advice it would be very easy to avoid the excess contributions tax.

Excess Contributions Tax learner guide

 

Also, your poll is missing an answer: Are you aware that effective superannuation related taxation can reach 93%?

* Yes, but I would seek personal tax advice to avoid paying the excess contributions tax

 

Perhaps..... there are many complications that make it very difficult, especially if taking a lump sum payment / payout. I don't say this hypothetically either & yes I have a good accountant.

Another factor is that anyone that receives income from a defined benefits scheme has "notional" contributions added in.... I note that politicians have explicitly exempted themselves from this rort. No surprise there.

FWIW, the new lower Div 293 threshold of 250k, whilst it seems like a lot, is likely to catch out many more people next year.

 

Accountants cannot discuss or give personal financial advice.

Indifference - The notional contributions is just part of it. Any member of a defined benefit scheme doesnt have an account balance but the new rules assume the balance is sixteen times their annual pension. This applies if they are 60 or 99. Makes no sense.

And if they have both pension and non defined pension super the balance in the defined pension MUST be counted first. I have a few clients who need to stop pensiosn from their smsf due to this silly rule.

If I was in Govt I would end super pensions for politicians and force them to choose where their contributions go. Then they would be as affected as everyone else.

Did you know judges and state policiticans and senior executives dont always pay tax on super and Div 293 is also exempted......They decided it may be unconstitutional.
Division 293 tax - information for super funds

 

My idea was to seek suitably qualified tax advice before contributing the funds to super. You can't just dump hundreds of thousands into super then ask your accountant to fix it at the end of the year.

It's like GST on the sale of new residential dwellings. You can't but the land, build the dwellings, sell the dwellings then ask your accountant to fix it so you pay less GST. You need to seek qualified legal and tax advice before you even put an offer on the block. My BIL did it the first way. Cost $300k in GST. Now that is a rort.