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PKF Australia

Accountants and Business Advisers

ATO’s Recent Investment Strategy Crackdown On SMSFs

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Daniel Clements

Principal

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ATO’s Recent Investment Strategy Crackdown On SMSFs

During the months of August and September, the Australian Taxation Office (ATO) contacted approximately 17,700 self-managed super fund (SMSF) trustees and their auditors where their records indicated that the SMSF may be holding 90% or more of its funds in one asset or a single asset class.

The ATO is concerned that some trustees haven’t given due consideration to diversifying their fund’s investment strategy and are subsequently placing the fund’s assets at risk. A lack of diversification can expose an SMSF and its members to unnecessary risk if a significant investment fails and may also be in breach of the investment strategy requirements as prescribed under superannuation legislation. If SMSF trustees are found to be in breach of this requirement by the ATO, they may attempt to impose penalties on the SMSF trustees.

Although this was a targeted campaign to address funds heavily invested in properties, particularly those with limited recourse borrowing arrangements (LRBAs), the ATO has advised they may expand their target audience in the future.

Preparing for the year end audit of your SMSF

If your SMSF is heavily invested in one asset or a single asset class, you need to review your current SMSF investment strategy to make sure it properly documents the basis for your decision to hold a significant asset in your SMSF which may lack liquidity and diversification.

As part of this, ensure the investment strategy complies with Regulation 4.09 of the SIS Act. You need to show evidence in your investment strategy of how you considered the following specific areas:

  • Diversification of your fund’s investments;
  • The risks associated with inadequate diversification within the context of your SMSF's investment portfolio;
  • The making, holding and realising, and the likely return from your investments having regard to your retirement objectives and expected cash flow requirements;
  • The liquidity of your investments, meaning the ability of your fund to pay benefits as members retire and pay other costs incurred by your fund; and
  • Whether to hold insurance cover for one or more members of your SMSF.

The ATO has confirmed simple documentation can constitute the sufficient evidence auditors require to satisfy themselves that the trustees have complied with their obligations regarding the SMSF investment strategy.

Dana Fleming, the Superannuation Assistant Commissioner for the ATO, advised at a recent SMSF conference that a simple trustee minute or some other kind of addendum to the investment strategy that acknowledges the reasons why the trustees have decided to invest their super primarily in a single asset would be sufficient. For example, ‘I have invested in property because I believe it has long-term growth and is suitable for my retirement objectives’.

She also clarified that the ATO has no right to say whether trustees are making a good or bad investment decision, however, they are looking for acknowledgement of the associated risk.

This is just a brief overview and there are many factors that should be managed and considered to ensure no superannuation legislation is breached. It cannot be stressed enough the importance of obtaining advice before entering into any transactions. This article is not intended to be advice that should be solely relied upon as it in no way considers your individual circumstances.


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