Say I have a div 293 tax debt to pay. Am I better off paying it from my super or paying it from my savings? Or is there no difference?
Cash flow is not a major concern. I just want to find the most cost or tax effective way to pay it.
Div 293 Debt - Better to Pay off from Super?
witsa on 27/11/2024 - 08:08
Comments
pay from savings
I always pay it out of my super, but I am a looooooooong way from retirement and the money in my pocket now is more helpful
Paying it from your own money is a better (rather than out of your super) financial decision if you are chasing a bigger super balance however
$5000 payment is approx $8620 pretax at 42% if paid from savings.
$5000 payment is approx $5882 pretax at 15% if paid from Super.I think paying from Super is more cost effective but depends on how close to retirement you are and what other use you might have for your savings.
This makes sense and should be considered. Anyone care to reply why this is downvoted?
Anyone care to reply why this is downvoted?
Because the downvoters generally have NFI?
What they have described was in the context of “why is super better for long term investment”, ie the same amount of pretax income would turn into higher invested amount if it’s done via pretax income > taxed at 15% > super, instead of pretax income > taxed at marginal rate > invest after tax.
However this same logic can’t be applied to “how should I pay the 5000 div 293”.
The Div 293 is paid AFTER all the income and super taxes have been taken, so the process of how much pretax money it took to generate the 5000 is no longer relevant.
To make it concrete, let’s assume that we have 800k dollar in saving and 300k dollar in super right at the moment div293 notice for 5k arrives at your mailbox. And yes let’s assume that this 300k balance is after your employer has contributed their 11.5% super guarantee this year, and has already been taxed 15% on the way in.
Now you have two options. Do you pay 5k div293 from saving, or from your super balance?
If you pay from saving, then you are left with 795k saving and 300k super; if you pay from super, then you are left with 800k saving and 295k super.
Now your net worth right at this moment will be the same regardless of how you pay for it; however it’s the future trajectory that will differ. This 5k in super will cost you more in your retirement nestegg compared to the 5k in saving, as super investment has low interest and more favourable tax treatments for income and eventual drawdown.
So how much the 5k “would have cost originally” does not matter at all from this perspective; it’s all done and decided by the time we make this decision, it’s only the future trajectory that will differ. So don’t let “how it costs from pretax income” influence this at all as it is irrelevant for this question.
So how much the 5k “would have cost originally” does not matter at all from this perspective;
I disagree. I didn't consider cary-over in my post but the suggestion by @akajin below is exactly that. Pay into $5882 toward carry-over and then pay $5000 for Div 293. This reduces taxable income by $5882, therefore reduces tax by $2646 (at 45%), so OP will be ahead by $1746 ($2646 - $882). Paying from savings would be more "expensive" so to speak, assuming my sums above are correct.
@soan papdi: You are still better off to: (contribute 5882 dollars into super AND pay 5000 dollars from your saving) compared to (contribute 5882 dollars into super AND pay 5000 dollars from super).
Let's just continue with my original figure for concrete calculations.
Before you make any plan, you have 800k in saving and 300k in super. And you receive a 5k div293 bill.
After @akajin's suggestion, you realise that you still have unused previous year concessional cap, so you decide to contribute concessional super using 5882 dollars of this year's pretax income as a carry-forward. Your super now has 5k extra, and your take home pay has only gone down by 5882*(1-0.47) = 3117.46.
At this point your new saving and super balance becomes 796,882.54 in saving, and 305k in super = 305000+796882.5 = 1,101,882.50 net worth.
You then go back to the same decision tree - with this (796,882.54 in saving, and 305k in super), do I pay 5k div 293 using my saving, or do I get it from the super?
Your decision will either make it (791,882.54 in saving, and 305k in super) or (796,882.54 in saving and 300k in super) - my previous argument holds again, i.e. your net worth is the same regardless, but your future wealth trajectory is better when you use saving.
@soan papdi: At the end of the day, from the "best" to the "worst" in terms of long term wealth building:
1. contribute 5882 concessional into super AND pay 5000 dollars from saving
2. contribute 5882 concessional into super AND pay 5000 dollars from super
3. don't contribute anything concessional AND pay 5000 from saving.
4. don't contribute anything concessional AND pay 5000 from super.@soan papdi: ITT: people who don’t understand maths who downvoted me despite laying out the maths using numerical examples.
@changyang1230: Agreed, it's a factual discussion with numbers that can be verified themselves, not sure why any negs are required.
While paying the div293 from saving vs super would cost the same amount of net worth right at this moment, your money in super will grow faster than your money outside super ever would, due to the low interest environment. Therefore your future net worth would be lower in the future if you took the money from super.
If you don’t think you would ever need the few thousands of cash realistically, and would consider these better used for long term wealth building, then it’s better to pay using cash.
If you have any concessional super contribution left from previous years rollover then pay extra into super and use super to pay off tax.
^ this
Depends what you mean by "better"?
This comes down to a trade off between cashflow and growing your retirement balance.
Either way, you are about to lose up to $4,500 to fund your Div293 tax if you've been making full use of the concessional contributions allowance.
Do you want to lose that from your savings, or from your future retirement balance/income?
If, as you say, cashflow is not an issue, I would suggest paying it from savings. While this is more costly in terms of pre-tax dollars (as others have mentioned), it also means more dollars stay in a lower tax environment (i.e. super) for longer. This benefit may well negate any nearer term costs.
General question — If I wanted to discuss this kind of topic with an expert - paid by the hour not on commission - what professional would i speak to?
I too have started getting charged this Div293 tax every year and do not know what type of person to meet with for advice.
For example the advice given above doesn't seem to suit me, as I think my compulsory employer super contributions on my PAYG income maxes out the "concessional contributions" every year anyway…hence this problem!
One newspaper finance expert in an AFR article suggested putting extra super into my Spouse's super, but doing that without proper advice seems super risky for tax reasons.I've met with "Tax Accountants" several times over the years who gave me no decent advice other than to beg me to put all my savings into Platforms that they control
Financial Planners seemed to do the same. (I have no "savings", but do have a mortgage and a decent income) ….Superannuation company websites and advice seem to be geared towards to people in their 60s.
I am a layperson, so just my opinion. There's no way to escape Div293 other than to reduce your taxable income somehow. AFAIK contribution splitting does not change the fact that you received it in the first place and won't save you from being charged for Div293.
Check if your super offers advice, like Hostplus does: https://hostplus.com.au/members/our-products-and-services/fi…
General question — If I wanted to discuss this kind of topic with an expert - paid by the hour not on commission - what professional would i speak to?
Not trying to be difficult, but the challenge many come across is defining "this kind of topic".
Many people will go to a financial adviser (as an example) and really have no idea why they are actually there. Along the way they get sold an "advice package" and end up wondering why and how this happened.
If your questions revolve around tax specifically, then an accountant will be the way to go. But they won't be able to (necessarily) advise you on your investment strategy.
answering this query and @dtc below -
"this kind of topic" is vague yes, but it's specifically on the question asked
— unexpected bills from the Tax Office saying you owe them money (despite getting a large Tax Return in that same year) , and that you can pull it out of your super account "if you like" because you made too many contributions to Super . To which I would reply "I made no contributions, only my employer made the minimum, so how can I control this" .
And secondly — the topic would include the counter advice here to put MORE money into your super (to reduce your taxable income?), using "concessional contributions" which are a minefield of 5 years of rolling balancesThe advice I'm after would be - How do I better prepare for completely unexpected situations like this? Despite paying for professionals to give me tax advice…
I have seen tax accountants asking whether I am claiming correctly, legally, effectively and been told yes, but here we are owing the Tax Office more money for a topic I've never heard about before!
here we are owing the Tax Office more money for a topic I've never heard about before!
Current Div293 taxable income threshold is 250K/yr. If this is the first time you've exceeded it, then yes it will be something new that you need to pay. And it happens each FY when you exceed the limit.
These questions are both relatively straightforward, although the answers are a bit long for a forum post. I'm surprised your accountant can't assist you with these as part of the natural course of your relationship.
That said, on the first part (and noting you are not contributing anything additional to your super) additional taxes arising from superannuation almost certainly relate to your income and not the value of the contributions. This is the essence of this Div293 issue discussed here. Without looking to the income side of the equation, it cannot be avoided. It is a painful catch in the superannuation tax system.
On the second, yes there are rolling periods to consider, but again anyone with a fairly nominal level of financial literacy can negotiate it fairly easily. Why this might be beyond the skills of your accountant is speculative.
In terms of being prepared for a Div293 bill, the ATO states, "Division 293 tax is an additional tax on super contributions, reducing the tax concession for individuals whose combined income and concessional contributions for Division 293 purposes is more than $250,000.". If this is you, then you need to be prepared for a related tax bill of up to $4,500.
The only way you can avoid s293 tax is to make no concessional super contributions in the year. However you still get a tax deduction, because the tax on your super contributions is 30% and if you didnt contribute it then it would be 47%. Plus earnings on those contributions is taxed at 15% (not affected by s293); whereas if you invested outside super its taxed at 47%.
Its simply a matter of getting a smaller tax concession if you have a high income. Still a concession, just less than it would be under the s293 threshold.
As to it being unexpected - now you know I guess. s293 isnt a secret but its only relevant to people over the threshold so if that wasnt you in the past then it is now.
Just be grateful you arent a pay as you go taxpayer (ie business owner) and you get hit with not only tax for the previous year all at once, but also a quarterly tax payment for future income at the same time - have to pay 125% of your tax bill.
The 'rolling balances' are not that complicated:
if you have less than $500,000 in super and you havent contributed the maximum concession amount in past years, then this year you can contribute both this years total and up to the unused amounts from the previous 5 years. Up to you to keep track of this, although the tax office will provide you with all the details you need in mygov. If you didnt contribute the full amount in the past years then definitely look at whether its worth doing so this year if you have spare cash.
if you have less than $1.66 million total super, you can contribute non concessional (after tax/not tax deductible) amounts comprising this year plus the next 2 years' worth of cap.
What kind of advice are you actually after?
s293 has nothing to do with super per se; its to do with your income.
why is putting extra into your wife's super an issue for tax reasons? You dont claim the deduction, your wife does. No one cares who earnt the money in the first place.
It depends on where you stand with your super and your age.
Are you currently ahead or behind on where you need to be by retirement?
If you are ahead with your super take the money from there.
Did you accidentally win this one?
Super grows in more tax effective basis so you might want to pay it out of savings.