Nick Bruining Q+A: How Division 293 tax liabilities work, and how you can avoid them

Question

My wife has just received a reminder from the Australian Taxation Office regarding a $3900 tax bill for a Division 293 debt.

Last year, she withdrew $340,000 from her superannuation and recontributed $150,000 as a non-concessional contribution.

We also made an additional concessional contribution of $20,000.

Her income last financial year was $56,000.

The ATO’s Division 293 assessment says her income was more than $400,000. Why was the withdrawal and recontribution to super used to generate a Division 293 liability?

Answer

I am sorry to read of your circumstances and the answer is complex.

Division 293 liabilities arise when a taxpayer’s adjusted taxable income exceeds $250,000.

While not stated in your question, it appears likely that your wife withdrew the money from an untaxed superannuation fund — most likely the State Government’s WestState or GoldState fund. These are not taxed like other funds.

Unfortunately, because she had the withdrawal paid to her directly, the full untaxed amount was added to her other income for the year. While not all of the $340,000 would be included, most of it would be.

While she was taxed at 15 per cent on the untaxed part, she would have also paid a Medicare levy of at least 2 per cent.

If we assume that of the total payment $330,000 was taxable income, the Medicare levy was at least $6600 and could be higher without private health insurance.

The $250,000 Division 293 threshold was easily exceeded with the addition of the super withdrawal but that ATI amount also included the voluntary concessional contribution of $20,000, plus any investment losses generated through strategies like negative gearing.

It means that all concessional contributions — including her employer’s compulsory 11.5 per cent contribution — were subject to the additional 15 per cent Division 293 contributions tax.

The sad thing is that the estimated $6600 Medicare levy and the $3900 Division 293 tax liability could have been avoided completely had she simply rolled the money into a “normal” taxed scheme first and then withdrawn the money.

The 15 per cent tax would have still been payable, but by the receiving super fund, not her individually.

Further, super funds don’t pay Medicare. As she was over 60, the withdrawal under those circumstances would have been completely tax-free.

It highlights the importance of obtaining competent financial advice before making big changes to your finances.

Question

I am a 71-year-old pensioner working part-time and supporting my wife who is on a disability support pension. My pension varies when I upload my income each fortnight.

Last year, I was able to make use of the $300-a-fortnight work bonus credit, along with the $4000 extra amount provided by the government.

I was just looking at my Centrelink records and noticed that all of my work bonus credit was gone.

Centrelink seemed to have missed applying the $4000 credit. How can I get this rectified?

Answer

Unfortunately, it appears that Centrelink has not misstated the amount of working bonus credit you have accrued.

The working bonus credit system allows age pensioners to earn $300 a fortnight from employment income in addition to the normal income-free area of $212 a fortnight for singles, or a combined $372 for couples.

Employment can be either as an employee or self-employed.

You cannot classify “passive” income as employment income. If you don’t use the full $300 working bonus credit in a fortnight, the unused amount accrues to a maximum amount of $11,800. Unused credits are not transferrable between partners.

A one-off $4000 working bonus credit was applied in 2022 and then extended to apply until the end of 2023.

The $4000 credit was not repeated in 2024. Instead, new pensioners from January 2024 have an immediate one-off $4000 working bonus credited to their working bonus “bank”.

That allows them to claim a pension and work, perhaps in a hand-over role, for the first few weeks following retirement and potentially still receive a full or part-pension.

Nick Bruining is an independent financial adviser and a member of the Certified Independent Financial Advisers Association