Additional Contributions Tax for High Income Earners: The New Division 293 Tax

The Government had announced in the 2012 Budget that an additional layer of contributions tax at 15% would be imposed on concessional contributions of individuals who are high income earners.  

Exposure Draft legislation to implement this new tax (set out in proposed Division 293 of the Income Tax Assessment Act 1997) has now been released for comment.  Essentially, the new Division 293 tax will apply to individuals whose level of income exceeds $300,000 in any financial year.

The new Division 293 tax will apply in respect of the 2012/13 and following financial years.

What is income for this tax?
In general terms the measure of income used will be the sum of the following:
•    taxable income;
•    reportable superannuation contributions; and
•    reportable fringe benefits.

Where an individual has a net investment loss (eg typically due to negative gearing) the amount of the loss will be added back to “taxable income”).

Also, if the individual has received amounts upon which family trust distribution tax has been paid, the net amounts will be added back to “taxable income”.

However, any member super benefit which has been taxed at 0% (because it falls within the low rate cap amount) will not be added back.

Amount of tax
The tax will apply to the concessional contributions which push the taxpayer above the $300,000 level.  Essentially, concessional contributions is treated as the top most slice of income and, to the extent the topmost slice exceeds $300,000, tax will be levied on the excess.

Tax will not be levied on excess concessional contributions.

The maximum amount of tax which will be payable is $3,750 (ie $15% of $25,000).  If the higher concessional contribution cap of $35,000 applies then the maximum amount of tax will be $5,250.

Paying the tax
The Government has learnt from the Superannuation Surcharge experience.  The ATO will issue notices of assessment in the name of the individual super member.  
The member has three options: namely
•    pay the assessed tax
•    pay the assessed tax and then seek to be reimbursed from their super fund; or
•    pass on the notice of assessment to the super fund (with a release authority) and for the super fund to pay the tax on behalf of the super member.

How does the tax apply to defined benefit interests?
The tax can relatively easily apply to accumulation interests.  However, it is a different matter for defined benefit interests.

For defined benefit interests, the tax will be determined by reference to “notional contributions” and the amount of the tax due and payable will be recorded in a debt account maintained by the ATO.  The real value of the debt account will be maintained by the accruing debt bearing interest.

When a benefit becomes payable out of the defined benefit interest, the ATO will have the first bite at the benefit to reduce the amount of the then accrued debt.

If you are sufficiently important – the tax does not apply to you
For Constitutional reasons, certain eminent persons will not be subject to the tax.  Principally, these eminent persons are judicial officers of the Commonwealth and of the various states and territories.

Final Comments
The Division 293 tax will not raise a significant amount of revenue.  It is intended not as a revenue measure but as a “social justice” measure to reduce the amount of tax expenditure provided to higher income earners.