Article:

SMSF investment strategies on ATO radar

11 September 2019

Mark Wilkinson , Partner, Superannuation |

The Australian Taxation Office (ATO) recently released a warning letter targeting compliance issues with SMSF investment strategies by trustees, which could lead to potential penalties.

SMSF Trustees are being urged to take steps to ensure compliance with current legislation - whereby funds must have a formulated investment strategy - or else face fines of up to $4,200.

The letter titled ‘Is your SMSF investment strategy meeting diversification requirements?’ has initially targeted SMSF trustees with a very high proportion of the fund assets held in a single asset class.

While to date it appears the majority of these letters have been sent to fund trustees with a large proportion of the fund held in real property, there’s no reason why trustees holding all their assets in cash, listed securities or some other type of investment may not be targeted by the ATO too.

What’s the issue?

The ATO’s primary concern is a belief that some SMSF fund trustees are not preparing compliant investment strategies that considers the risk, return, diversity and liquidity of the funds’ investments.

More specifically, they are concerned with Section 52(2)(f) of the Superannuation Industry (Supervision) Act 1993 ( the Act).

Under this provision it’s required:

To formulate, review regularly and give effect to an investment strategy that has regard to the whole of the circumstances of the fund, including but not limited to, the following:

  1. The risk involved in making, holding and realising, and likely return from, the fund’s investments, having regard to its objectives and its expected cash flow requirements;
  2. The composition of the funds’ investments as a whole including the extent to which the investments are diverse or involve the fund in being exposed to risks from inadequate diversification
  3. The liquidity of the funds’ investments, having regard to its expected cash flow requirements
  4. The ability of the fund to discharge it existing and prospective liabilities.

What should you be doing?

Given this is on the ATO's radar and has potentially high penalties, it’s important to review your investment strategy to make sure it complies with the law and to ensure you aren’t penalised.

In particular, you need to be able to provide evidence, ideally within a clearly detailed outline of the fund’s investment strategy, which articulates the above pertinent to your fund.

We recommend all SMSF trustees review their strategies by taking the following three steps:

Step 1

Review the existing invesment strategy to see if evidence exists within the strategy to indicate you have considered risk, return, diversity and liquidity when preparing the investment strategy.

Step 2

If the existing strategy doesn’t contain the evidence needed to demonstrate risk, returns, diversity and liquidity, the trustee will need to review the existing investment strategy and update it where necessary.

Step 3

In some cases you may find actual investments do not match the strategy outlined in the investment strategy. If this applies to you, then the trustees must either amend the strategy or alter the investments.

BDO Private Wealth Advisers Pty Ltd is able to assist your clients to review, alter and document investment strategies.

If you are unsure if your SMSF strategy is compliant, or need assistance in updating your investment strategy, please get in touch with your BDO Private Wealth Adviser.