Are you a high earner nearing retirement and considering selling shares to boost your superannuation savings? If your income exceeds $250,000, you’re likely to encounter Division 293 tax, an additional 15% tax on concessional super contributions. But don’t worry – with strategic planning, you can manage this tax effectively and even support charitable causes in the process.

Understanding Division 293 Tax

Division 293 tax is designed to ensure that high-income earners contribute their fair share to the tax system. It applies when your “adjusted taxable income” surpasses $250,000. This includes your salary, concessional super contributions, and other taxable income such as bonuses, capital gains, and even redundancy payments.

For example, if your salary is $200,000 plus superannuation contributions of $22,000, and you sell shares with a taxable capital gain of $80,000, your adjusted taxable income would be $302,000. This triggers Division 293 tax, meaning an additional 15% tax on your super contributions, or $3,300 in your case.

Reduce Your Taxable Income with Charitable Donations

The best way to avoid Division 293 tax is to reduce your taxable income below the $250,000 threshold. One effective strategy is to make tax-deductible donations to charities. Not only does this reduce your taxable income, but it also supports causes you care about.

Example Scenario: Charity Donations vs. Higher Tax Bills

Consider this scenario: You earn $200,000 plus $22,000 in concessional super contributions and realize an $80,000 capital gain from selling shares. Without any deductions, you’d face taxes totaling $108,867 (personal tax of $102,267, contributions tax of $3,300, and $3,300 in Division 293 tax).

If you donate $55,000 to a sub-fund in a public ancillary fund, your taxable income drops to $247,000. Consequently, your tax bill reduces to $79,717, saving you more than $25,000.

Making the Right Choice

While making charitable donations significantly reduces your tax liability, it’s essential to weigh the financial outcomes. Donating $55,000 saves you on taxes, but you end up with a net after-tax result of $170,300. Alternatively, without donations, you pay around $108,000 in taxes on your $302,000 income, leaving you with $194,000.

Ultimately, while the donation strategy offers tax benefits and supports charitable causes, choosing not to donate may leave you financially better off. However, the impact on the charities is profound, missing out on $55,000 in donations.

Conclusion

Navigating Division 293 tax requires strategic planning, especially for high-income earners nearing retirement. By reducing your taxable income through charitable donations, you can manage your tax liability effectively while contributing to meaningful causes. Evaluate your options and choose the strategy that aligns with your financial goals and philanthropic interests.

If you need any help with managing your tax situation, please contact Cadre Capital Partners and we will endeavour to assist in any way we can.