Division 293 Tax: What High-Income SMSF Trustees Need to Know Before Borrowing

Crossing the threshold into high-earner territory is a milestone worth celebrating. It usually means your career or business is firing on all cylinders. But as your income grows, so does the attention you receive from the Australian Taxation Office (ATO).

If you manage a Self-Managed Super Fund (SMSF), one tax rule catches high earners off guard more than almost any other: Division 293 tax.

When you combine a high income with an ambitious plan to leverage your SMSF for property investment, an unexpected tax assessment can ripple through your cash flow. While tightening lender policies and shifting regulatory landscapes have pushed many investors away from residential property borrowing, commercial real estate remains a premier wealth-creation strategy for high-income trustees.

Before you sign a contract for a commercial warehouse, office, or retail space, here’s what you need to know about Division 293 tax and how it impacts your SMSF borrowing strategy.

What Is Division 293 Tax?

Under normal circumstances, concessional (before-tax) super contributions are taxed at a flat rate of 15% within your fund. This is significantly lower than the top personal marginal tax rate, making super one of the best tax shelters in the country.

Division 293 tax reduces that tax concession for high earners. It adds an extra 15% tax on your concessional contributions, taking the total tax on those contributions up to 30%.

What Is the Division 293 Tax Threshold?

Currently, the threshold sits at $250,000.

If your combined “income for surcharge purposes” plus your “low-tax concessional super contributions” cross this $250,000 mark, Division 293 tax applies to you.

Note that your income for Division 293 purposes is not just your base salary. The ATO calculates it by taking your taxable income and adding back items such as net rental losses, reportable fringe benefits, and reportable super contributions. A one-off bonus, a business dividend, or the sale of an asset outside super can easily push you over the line for a given financial year.

How to Calculate Division 293 Tax

Learning how to calculate Division 293 tax is straightforward once you know what the ATO looks at. The extra 15% tax isn’t automatically applied to all your super contributions. Instead, it applies to the lesser of two amounts:

1. The portion of your combined income and contributions that exceeds the $250,000 threshold.

2. Your total taxable (concessional) super contributions for that financial year.

For example, imagine your taxable income is $240,000, and your employer contributes $20,000 in super guarantee to your fund. Your combined total is $260,000, which exceeds the $250,000 threshold by $10,000. Because $10,000 is less than your total $20,000 contribution, your Division 293 tax assessment will be 15% of $10,000, which comes to $1,500.

If your income alone is already $280,000, any concessional contribution you make up to the annual cap will attract the full extra 15% tax.

Why This Matters When Borrowing for Commercial Property

When high-income business owners and professionals set out to build long-term wealth, commercial property is often the asset of choice. Buying a commercial property through a Limited Recourse Borrowing Arrangement (LRBA) offers significant benefits:

• Business Leasebacks: If you own a business, your SMSF can purchase your commercial premises and lease it back to your operating entity at market rates.

• Asset Protection: Holding commercial property inside your SMSF keeps it separate from your personal or business operational liabilities.

• Favourable Earnings Tax: Rental income inside the fund is taxed at the standard SMSF income tax rate of 15% (or potentially 0% in pension phase), compared to your top personal marginal rate.

However, when you use an LRBA to purchase commercial real estate, lenders evaluate your fund’s liquidity very closely. They want to see that your SMSF has enough cash flow to service loan repayments, pay property expenses, and maintain a safety buffer.

This is where Division 293 tax creates a friction point. Many trustees rely on maximum concessional contributions to help service their SMSF loan. If 15% of those contributions is taken out to settle a Division 293 bill, your net contribution cash flow drops. If you don’t factor this reduction into your servicing model before applying for finance, your borrowing capacity could take an unexpected hit.

Should I Pay Division 293 Tax From My Super?

When your tax notice arrives, you face a strategic choice: should you pay Division 293 tax from your super or out of your personal bank account?

There’s no one-size-fits-all answer, but here is how both options affect your property strategy:

Option 1: Paying Personally

Paying the assessment from your personal savings preserves every dollar inside your SMSF. Your fund maintains its cash reserves, which helps meet lender liquidity requirements and ensures smooth debt servicing for your commercial property. The downside is that it requires out-of-pocket cash from your personal account.

Option 2: Releasing Money From Your SMSF

You can authorise the ATO to release funds directly from your SMSF to pay the tax bill. This protects your personal cash flow, but it draws down on your fund’s cash reserves. If your fund is geared up for a commercial property purchase, drawing cash out to pay tax bills reduces the capital available for loan deposits, settlement costs, or ongoing liquidity buffers required by lenders.

If your fund holds key person insurance or SMSF income protection policies to safeguard loan repayments during unexpected events, managing your fund’s liquid cash becomes even more critical. You cannot afford to let tax payments compromise essential operational costs or risk coverage.

Can You Avoid or Reduce Division 293 Tax?

The short answer is that Division 293 is written into tax law, so if your combined income and contributions cross $250,000, the tax applies. You can’t simply opt out. However, there are legitimate strategies to reduce Division 293 tax or manage its timing so it doesn’t derail your investment goals:

• Timing Capital Gains: If you plan to sell an asset outside super, consider timing the sale across financial years. Spreading or deferring a large gain can keep your income below the threshold in a year when you plan to make large super contributions.

• Utilising Non-Concessional Contributions: Non-concessional (after-tax) contributions are not subject to Division 293 tax. If your fund needs capital to service a commercial property loan, injecting after-tax funds can build SMSF liquidity without triggering extra tax levies.

• Salary and Dividend Structuring: For business owners, reviewing how you draw income out of your operating business can help manage your adjusted taxable income.

Working with specialist advisers allows you to explore tailored strategies to reduce Division 293 tax while keeping your property acquisition on track.

Plan Ahead for Stress-Free Borrowing

A Division 293 tax assessment is not a reason to abandon your commercial property ambitions. In fact, it’s often a sign that your wealth strategy is working and your earning power is strong. The key is ensuring that tax liabilities are built into your financial model long before you submit a loan application.

When you accurately model your net contributions, factor in tax obligations, and structure your LRBA correctly, leverage becomes a powerful tool to accelerate your retirement wealth.

So, if you’re planning to acquire commercial real estate through your fund, getting expert lending guidance early makes all the difference. At SMSF Loan Experts, we help you deal with the complexities of SMSF finance, structure your loan for maximum flexibility, and ensure tax considerations never stall your property momentum. Don’t hesitate to reach out to us. 

Disclaimer: This article contains general information only and does not constitute personal financial, taxation, or legal advice. Before acting on any information, you should consider your circumstances and seek advice from a licensed financial advisor or SMSF specialist.