Managing Div 293 tax for doctors
Doctors coming to the end of training will be happy to see some reward for many years of hard work and study, being a jump in income. It is crucial to understand how such a jump can impact your tax.
For starters, everything you earn over $180k is taxed at 47% including the Medicare Levy, based on the current tax rates. The next threshold to consider is $250k – including super contributions and Reportable Fringe Benefits (RFBs) – from salary packaging, as this is when Div 293 tax for doctors applies.
What is Div 293 tax?
Several years ago, a broad review of the Australian tax system discovered that higher income earners were deriving a disproportionately high tax advantage by contributing funds to super and obtaining a deduction. Taxpayers earning over $180k, derive a tax benefit of 32 cents for every dollar that goes into super being 47% income tax saved in their name, less 15% tax on the contribution inside the super fund itself.
In 2012, the Government legislated that those earning $300k at the time ($250k since 1 July 2017) should have to pay an additional 15% tax on concessional super contributions. This tax, called Division 293 tax, is paid when the taxpayer lodges their return.
The ATO matches the Div 293 income threshold with deductible super contributions reported for the taxpayer, then issues an assessment notice for it. The taxpayer is given the choice of paying this tax from their own cash outside super or using funds inside super, any doctor who is unsure, should seek personal wealth/financial planning advice.
Let’s look at an example
Dr Smith earns $350k from their public hospital position and their employer contributes superannuation guarantee (SG) at the applicable rate. If there is any shortfall between contributions and the annual cap limit, Dr Smith salary sacrifices up to the annual concessional contribution limit of $27,500. Upon lodgement of their tax return, Dr Smith will be issued a Division 293 tax assessment of $4,125 being 15% of the $27,500.
Note that medical professionals only pay Div 293 tax to the extent they exceed the threshold. Say your Div 293 income is $260k, but super contributions are $25k, your Div 293 tax assessment would be $1,500 being 15% of the $10k, not 15% of the entire $25k.
What is salary packaging?
Salary packaging is a unique tax saving benefit for anyone that works in the public hospital system. It allows medical professionals to apportion part of their income to certain expenses, therefore, reduce their taxable income and increase their tax pay.
To know more on how salary packaging for doctors works, read Salary packaging and reportable fringe benefits – How they are calculated
Why are Superannuation Guarantee (SG) amounts capped?
Employing staff on high salaries is expensive for a business and not just because of the salary. Payroll tax, super and leave entitlements can make higher salaries extremely unattractive to businesses.
The Government legislated a cap on quarterly earnings that attract the SG rate to ease some of the burden of paying staff higher wages whilst giving control of some of the super to the employee. The maximum SG an employer has to make per quarter in the 2022-23 financial year is $6,323 (earnings of $60,220). This allows for annual contributions of $25,292.
High income earners such as medical professionals may give consideration towards topping-up their super contributions annually, pending advice from their medical financial tax adviser and financial adviser.
What if I exceed my super cap?
After using up any brought forward unused cap space (assuming a balance under $500k), excess concessional contributions are taxed at your marginal rate. This also happens upon lodgment of your tax return. Contributions previously treated as deductible are added back to your assessable income and any tax saved is effectively repaid.
This process turns concessional contributions into non-deductible (also called non-concessional) contributions. You cannot pay Div 293 tax on excess contributions, it is capped at 15% of the final amount of deductible contributions.
How does salary packaging impact Div 293 tax for doctors?
The Reportable Fringe Benefit (RFB) reported through Single Touch Payroll (STP) by your employer, seeks to show what your total employment income would be if you did not salary package any income but instead, earned the tax-free income before paying tax at the highest marginal rate, currently 47% (45% income tax plus 2% medicare levy).
Therefore, your income statement from a hospital will show RFBs of up to $22,000 being the $9,010 living expenses cap and $2,650 meal entertainment cap grossed up by a factor of (1-47%).
It is the RFBs that are added back to medical professionals’ taxable income (the Adjustable Taxable Income – ATI), along with investment losses, to calculate the Division 293 tax threshold.
Although the Div 293 tax is the same for everyone, across the country, in reality it affects Australian medical professionals differently depending on which state they are in.
Div 293 tax for doctors in New South Wales
Medical professionals in NSW are faced with a variation of this tax rule, which can sometimes cause more confusion as to whether or not salary packaging for doctors is even worth doing.
A common question we get is:
NSW Health takes 50% of my packaging benefits and I earn over $250k, is salary packaging still worthwhile?
The short answer is, yes it is!
To illustrate, let’s look at two scenarios for Div 293 tax and salary packaging for doctors particularly in NSW:
- If you are well over the $250k threshold, then Div293 tax will apply regardless of any additional salary packaging. It will also only apply to your total concessional contributions.
It is not an income tax, so you should still have a salary package.
- Let’s say your income is $245k for the year, from all sources. If you were to salary package the full caps, that should reduce your taxable income to $233,340. Adding back the RFBs of $22k, puts you over the $250k threshold at $255,340.
You would have to pay Div 293 tax BUT not on ALL of your super contributions, only to the extent you exceed the threshold i.e. $5,340 so $801.
You just saved $2,740 from salary packaging being 47% of the cap limits, divided by two. You are still $1,939 better off by salary packaging.
Like most Australian tax law, Div 293 tax and super is certainly not simple, book an appointment to lodge your next tax return with a medical tax specialist who can help you understand and plan for the tax you are paying.
Disclaimer: *This article contains general information only and does not consider your personal objectives, financial situation or needs. You should assess whether the information contained in this communication is appropriate in relation to your own objectives, financial situation or needs