Investment strategies of SMSFs are under scrutiny from the ATO, who are concerned that “a lack of diversification can expose the SMSF and its members to unnecessary risk if a significant investment fails”.
The Australian Taxation Office (ATO) will be contacting 17,700 trustees about a lack of asset diversity.
This does not mean that you must have diversity in your fund.
A lack of diversity might be a strategic decision by the trustees but you need to be able to prove that the strategy was an active
decision.
Superannuation Industry Regulations require that trustees “formulate, review regularly and give effect to an investment strategy that has
regard to the whole of the circumstances of the entity.”
To do that you need to:
- Recognise the risk involved in the investment, its objectives and the cash flow of the fund
- Review the diversity of the investment strategy (or otherwise) and the exposure of a lack of diversity
- Assess the liquidity of the investment and cashflow requirements of the fund
- Assess the ability of the fund to discharge its liabilities, and
- Review and have in place appropriate insurance cover for members and assets
Most importantly, you need to be able to justify how you formulated your strategy if the ATO asks.
The 17,700 people being contacted by the ATO hold 90% or more of the fund’s assets in a single asset or single asset class.
Property is one of the problem areas the ATO is looking at. With property prices at a low point, the asset value of many funds has diminished.
In addition, debt taken on by SMSFs has significantly increased. The number of SMSFs using Limited Recourse Borrowing Arrangements (LRBAs) to purchase property has increased significantly since 2013.
For SMSFs that have purchased property through an LRBAs, on average, these LRBAs represent 68% of total assets of the funds.
We highly recommend you talk to a trusted advisor about your SMSF and make sure you’re in the loop about the strategies in place in case the ATO comes knocking.
Looking for a really good advisor with heaps of SMSF experience? Get in touch with us!