SMSF members who are required to pay division 293 tax should remember it will be applied to any unrestricted, non-preserved benefits first as it is not a tax within the fund, but a benefit payment.
Accurium head of education Mark Ellem said while it would seem to make sense that a division 293 tax draws from an SMSF member’s preserved component first because any tax on concessional contributions does so, that was not the case.
“What this question alludes to is that if contributions are subject to preservation, you take the tax on the contribution and deduct that from the preserved component, and if the member is subject to division 293 tax – which is related to a contribution – logically that would also come from the preserved component,” Ellem said during a recent webinar.
“That is not the case because a tax on a concessional contribution is not tax on the fund and a division 293 assessment is tax on the individual that they can elect for an amount to be released from their super fund to pay that tax assessment.
“It is, in effect, a benefit payment that can only be made where an individual receives a release authority and provides that to the trustee.”
He said the Superannuation Industry (Supervision) (SIS) Regulations contained rules and schedules around conditions of release and a division 293 benefit payment had restrictions that only allowed the release of funds subject to a release authority.
“So, it is a benefit payment subject to a restriction and that brings in SIS regulation 6.22A, which state where this a benefit payment with a restriction, then the order of cashing is unrestricted non-preserved first, restricted non-preserved second and then preserved benefits,” he said.
“In this scenario when the member gets the division 293 notice and they elect to have it paid by their super fund, the benefit payment, being the division 293 payment, will come from the unrestricted non-preserved first and will eat that up first before it moves into the reserved component.”
Division 293 tax is an additional liability incurred on superannuation income generated from contributions that exceed $300,000 and the ability of SMSFs to pay the tax was first outlined by the ATO in late 2019.
