ATO Crackdown on Property held by SMSFs

10 September 2019

The Australian Taxation Office (ATO) has contacted almost 18,000 Self-Managed Superannuation Fund (SMSF) trustees, to check if their fund has adequate diversification across its investment portfolio.

BDO Superannuation Partner, Mark Wilkinson said the intention is to reduce the risks of inadequate diversification within the context of the SMSF’s investment portfolio

“In particular, the ATO has highlighted the specific risk around property held by SMSFs,” Mark said.

“This is because around one-third of the *$39 billion in property loans by SMSFs are guaranteed by assets outside of super, such as the family home.

“If there were to be corrections or changes in the real estate market, this would have a significant knock-on effect for the security of many Australians superannuation and retirement plans.”

“If the SMSF is found to breach the diversification requirements, they could be liable for an administrative penalty of $4200.”

Mark said: to minimise the chance of receiving a breach notice from the ATO, there are 5 areas to look at:

  1. The sole purpose test - When making any investment decision, SMSF trustees should consider section 62 of the Superannuation Industry (Supervision) Act 1993 (the SIS Act).The legislation, which is generally referred to as the sole purpose test, states that SMSFs must be maintained solely to provide benefits in retirement or benefits to dependants upon a member’s death. 
  2. Ensure assets are held in the correct name - SMSF trustees are responsible for ensuring the assets of the fund are kept separate from personal and business assets.
  3. Restrictions on certain types of investments - SMSF trustees have restrictions on them about the type of asset they choose to acquire within the fund.
  4. Cryptocurrency - While SMSFs are not prohibited from investing in cryptocurrencies, such as Bitcoin, the investment must: be specifically allowed for under the fund’s trust deed; be in accordance with the fund’s investment strategy and comply with the SIS Act and regulations.
  5. Property and short term holiday rentals - short term holiday rentals like Airbnb are becoming a popular way to rent out a property. While there is nothing in the legislation that prevents a SMSF from renting the fund’s property in this way it is important the fund’s investment strategy is documented appropriately, considers the risks associated with this type of rental arrangement and the fund’s short-term and long-term liquidity and cash flow requirements.  

“Fund trustees regardless of whether they receive a letter from the ATO or not, should review their investment strategies annually and ensure that they contain evidence that the trustee has considered risk, return, liquidity and diversity when formulating the investment strategy.”

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*Source: AFR