I received an ATO letter re: SMSF investment strategy and diversification – what do I need to do?

Created on March 13, 2020 5:15 pm

You may be aware that the Australian Tax Office (ATO) has issued letters to nearly 18,000 SMSF trustees as part of a campaign to ensure trustees are aware of their investment obligations.

Of key concern is ensuring that trustees have considered diversification and liquidity of their assets when formulating and executing their fund’s investment strategy.

Importantly, it must be noted that the ATO letters are not an attempt to regulate and limit the control and freedom that SMSF trustees have but rather ensuring that if trustees wish to invest their assets in a certain way that they must clearly articulate their reasons for doing so.

What does the ATO expect in an investment strategy?

An investment strategy should be considering the SMSF’s blueprint when dealing with the fund’s assets to ensure the SMSF’s investment objectives and members’ goals are met. It provides the parameters to ensure you invest your money in accordance with that strategy.

An SMSF investment strategy must be documented and take into account the following items:

  • diversification of the fund’s investments and the risks associated with inadequate diversification; and
  • that other relevant factors were considered such as the risk involved in making, holding and realising and the likely return from the investments having regard to the fund’s objectives and expected cash flow requirements;
  • the liquidity of the SMSF’s investments, having regard to its expected cash flow requirements and ability to discharge its existing and prospective liabilities; and
  • whether the trustees considered holding insurance for one or more of the members.

So what shall I do now?

The ATO’s latest guidelines have issued a “best practice” approach which includes:

  • keep records of your investment decisions by way of minutes or detailed notes as evidence that considerations have been made; even if there is no change in the investment strategy still document that the existing strategy has been reviewed and no changes will be made and list the reasons why;
  • do not back-date the investment strategy or an other associated documentation;
  • each fund should have a tailored investment strategy showing the reasons why the investments meet the stated goals as all SMSFs are unique in their circumstances; investment strategies should cannot merely “repeat the words in the legislation”;
  • it’s not reasonable to specify ranges are 0-100% for each asset class;
  • the trustees must demonstrate the investment strategy is adhered to and reviewed.

What happens if my fund has a single asset strategy such as property?

Just because your fund is invested in one asset or a single asset class, this does not mean it is non-compliant. A SMSF which may have a property under a limited recourse borrowing arrangement, or invested mainly in cash or equities. Provided the trustees document their reasoning on the non-diversification on factors such as the age of the members, risk tolerance levels, cash flow requirements and fund investment objectives, the fund can continue being invested in the one asset or single asset class.

Where you have in place an adequate investment strategy that deals with these risks and can provide the necessary evidence to support your investment decisions, no further action is expected.

Where your fund has not complied with its investment strategy requirements under superannuation law, you may be liable to administrative penalties being imposed by the ATO, as Regulator of the SMSF sector.