The ATO have recently been contacting approximately 17,700 SMSF trustees alerting them to the risks of not meeting the diversification requirement of the SIS Regulations when formulating and reviewing their SMSF’s investment strategy.

Specifically, the ATO are currently focusing on Trustees of SMSFs that have 90% or more of their assets invested in a single asset or asset class and have a Limited Recourse Borrowing Arrangement (LRBA) in place over that asset (which is usually property).  The ATO are concerned that less diversified SMSFs with LRBAs are exposed to asset concentration risk, which in the event of a fall in that asset’s market, could lead to a significant loss in the value of the SMSF.  This is particularly significant for those lower value SMSFs whose main investment is a geared property.

What do you need to do?

For SMSFs who have been contacted by the ATO, it is important not to panic. Whilst the letters from the ATO appear heavy handed, it is reminder to ensure the SMSF’s investment strategy addresses all requirements of Regulation 4.09 of the SIS Regulations.

The key requirements to be considered in a formulating and reviewing your SMSF Investment Strategy (as prescribed by Regulation 4.09) are:

  • diversification (investing in a range of assets and asset classes)
  • the liquidity of the SMSF’s assets (how easily they can be converted to cash to meet expenses)
  • the SMSF’s ability to pay benefits (when members retire) and pay expenses
  • the members’ needs and circumstances (for example, their age and retirement needs)
  • the members’ insurance needs.

Does your current SMSF investment strategy address the above?

Any changes required to your SMSF’s investment strategy should be documented and provided to the Fund auditor before the next annual audit.

It is also a reminder for all SMSF Trustees to ensure their current investment strategy is up to date and in line with members goals and objectives.

What should you expect from fund auditor?

It must be noted that Fund auditors have also been contacted by the ATO to remind them of their obligation to check each SMSF’s investment strategy for compliance with each requirement of Regulation 4.09 (which includes consideration of diversification).  A breach of this legislation may be reported to the ATO.

Your fund auditor is likely to examine and request further documentation (including trustee minutes) regarding investment decisions, specifically looking for evidence that SMSF trustees have considered and documented how they have addressed each investment strategy requirement when making a significant investment.

Your auditor will also consider whether you have complied with your investment strategy, particularly in respect of compliance with the range of investment classes specified in the strategy.

If you have any concerns regarding your SMSF investment strategy and its compliance with the SIS Regulations, please contact Davidsons SMSF Manager Simon Abbott on simona@davidsons.com.au or (03) 5244 6867.

Disclaimer: The information that provided in this article is factual in nature and objectively ascertainable and, therefore, does not constitute financial product advice. Importantly, the factual information that has been supplied does not take into account your personal circumstances, objectives or goals.
Davidsons is not licensed to provide any financial product advice nor make any recommendations in respect of any financial product. If you require such advice, you will need to consult a financial adviser who is licensed to provide financial product advice before you make a decision on a financial product.