Investment strategies, documentation on ATO’s radar

Last year, the ATO conducted an audit of the top SMSF auditors and identified too many cases where auditors had failed to obtain sufficient documentary evidence to support their findings, Mr Burgess explained.

“As a result of that, auditors are going to be asking for more information around valuations particularly when there’s unlisted investments in the fund. [They will be asking for] documents that support the valuation documents that provide ownership of the assets and so forth,” he said.

It’s particularly important that funds that have provided rent relief to tenants document that relief appropriately, Mr Burgess said, as there could be potential breaches if the relief they’ve provided is not on an arm’s-length basis.

“It could also be a breach of the sole purpose test, and if it’s a related party tenant, there could be a breach of the in-house asset rules or a breach of section 65 where it’s considered to be providing financial assistance to a member,” he warned.

Mr Burgess reminded SMSF professionals that they can use the Mandatory Code of Conduct to determine what would be considered commercial terms.

“They also need to make sure that the rent relief was being offered as a result of COVID-19, so the tenant needs to provide evidence that they have been impacted by COVID-19,” he said.

“The third requirement that the ATO is looking for here is appropriate documentation that the rental agreement has been adjusted.”

This could be either through an addendum attached to the agreement or an amendment to the original agreement depending on what the terms of agreement are, he explained.

“There needs to be evidence that the agreement has been signed by both parties though,” he noted.

“As long as those three things are in place, the ATO will be satisfied that there has been no breach of section 109 or section 84 if it’s a related party tenant.”

Mr Burgess also noted that while the ATO has confirmed there won’t be a breach of the in-house asset rules where a fund has exceeded the 5 per cent in-house asset limit at 30 June 2019 but hasn’t been able to implement their rectification plan in the 2019–20 year due to the downturn in markets, they are still required to have a plan.

“In those situations, there’s no breach of the in-house asset rules and the same will apply for this income year. So, where the fund was in excess of 5 per cent at 30 June 2020, they won’t be required to apply a rectification plan by the end of next financial year if they haven’t been able to do so because of COVID-19, but the important point to make is that they’re still required to have a plan,” he cautioned.

“So, while they’re not required to implement it, they’re still required to have a plan if they’ve exceeded the in-house asset limits.”

Investment strategies will be another key focus, he warned, particularly in light of recent guidance issued by the ATO.

Last year, the ATO contacted over 17,000 SMSF trustees who, according to their records, had 90 per cent of the fund’s investments are invested in one asset or one asset class.

Earlier this year, it then issued some guidelines to help SMSF trustees properly formulate their investment strategies.

“As a result of that, auditors will be paying closer attention to investment strategies, particularly for funds that have a large proportion of their fund invested in a single asset. They may be required the investment strategy to be updated if they’re not satisfied that the trustees have properly considered risk and return, diversification and the cash-flow requirements of the fund,” Mr Burgess said.

“That may simply require an [addendum] to the investment strategy. The [addendum] enables the trustees to provide further details of their considerations around the investment strategy.”

Given the economic impact of COVID-19, Mr Burgess said there may be other reasons now as to why they need to review their investment strategy.