Strategy, Superannuation

SG concessional cap arbitrage still exists

An SMSF lawyer has recommended advisers should study the individual circumstances of high-salaried individuals before instructing them to opt out of super guarantee (SG) contributions in case there is an arbitrage opportunity between the earnings on excess contributions and the shortfall interest charge (SIC) levied against them.

Currently, if a person exceeds the concessional contributions caps, they will be charged an SIC on the excess of 4.96 per cent.

“If actual earnings in the SMSF will be more than the excess contributions charge, it would be good [to resist opting out of the SG]. Why? Because he’s got to pull out 5 per cent from the fund and be taxed at marginal rates, but if the money goes into the fund and was earning 10, 15 or 20 per cent, there is a bit of a tax arbitrage,” DBA Lawyers special counsel Bryce Figot told attendees at his firm’s most recent strategy seminar in Sydney.

“So if you think the fund is going to make more than the SIC rate, it’s good to remain in the excess system.

“But if actual earnings in the SMSF will be less than the excess contributions charge, it will probably be bad [to continue the offending SG contributions].”

However, Figot pointed out he thought it was virtually impossible to create a formula to allow advisers to know when to recommend their clients opt out of the SG regime definitively.

“I think we’ll just have to have a rule of thumb because to try and really work it out I think will honestly just be too hard and I also suspect that the overall benefit will probably be relatively small as to whether you go here or there,” he said.

“It’s probably just a couple of thousand dollars as to whether you opt out or stay in and I don’t think clients will want to pay too much in the way of fees.

“So I think we just need a rule of thumb and I suspect the rule of thumb will be if you can opt out, you do opt out.”

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