ATO assistant commissioner Dana Fleming said the Tax Office is contacting all SMSFs that hold 90 per cent of their assets in a single asset class to remind them of their legal obligations in formulating their investment strategy as outlined in the operating standard contained in regulation 4.09 of the Superannuation Industry (Supervision) Regulations 1994.
“In particular, this includes having an investment strategy that considers the composition of the fund’s investments, including the extent to which they are diverse and the level of risk for the fund and its members where there is inadequate diversification — sometimes referred to as concentration risk,” Ms Fleming said.
“SMSF trustees must also be able to demonstrate they have satisfied the other investment strategy legal requirements which include consideration of the risk involved in making, holding and realising investments; the amount of liquidity needed to pay expenses and benefits; and whether the fund should holds a contract of insurance for one or more of the members.”
Ms Fleming said while many of these SMSFs will have a very well-thought strategy and meet all their obligations, it is a reminder to others that when investing in assets, they need to comply with the operating standard and ensure the fund’s investment strategy clearly documents the reasons behind the investment decisions.
“Best practice is to document all these decisions and to seek advice when developing their investment strategy,” Ms Fleming said.
As part of its focus on this area, the ATO will also be contacting the auditors of these SMSFs to let them know its concerns in relation to concentration risk.
“SMSFs auditors are entitled to ask for evidence of how the trustees have complied with regulation 4.09, and failure to comply can result in the imposition of SMSF administrative penalties equivalent to 20 penalty units,” Ms Fleming said.
Data in the report handed down by the Council of Financial Regulators in February this year indicated in the 2017 financial year, 41 per cent of SMSFs with an LRBA had concentration levels in a single asset class of above 90 per cent.
At the time, this represented around 16,700; however, following further lodgements and changes in statistics, the figure has now climbed to 17,700 based on the ATO’s latest reports, Ms Fleming said.
In 2014?, the Australian National Audit Office asked Treasury if the ATO had any prudential responsibility to regulate investment strategies in the same way that APRA has to regulate APRA Funds. ANAO was told no. Didn’t the ATO read that ANAO report?
This seems to be aimed at LRBA’s, what risk is there an LRBA is limits the risk in its very nature.
I have considered all the factors required and decided to concentrate on one class of asset. It is MY money and it is SELF MANAGED. Neither Warren Buffett nor George Soros worry about diversification because it “represents insurance against not knowing what you are doing”.
Also, it has previously been accepted that trustees can take into account assets held by the members outside of superannuation in considering an appropriate allocation.
What evidence is there that SMSFs that have or have had (at some point in time) a concentrated investment portfolio, be it in shares or in property, have run into difficulties?
What are the investment qualifications of those raising these issues? If they are such experts, what are they doing at the ATO or ASIC? Surely investment managers would have poached them a long time ago, wouldn’t they7?
What if the single asset class is Cash? What’s the concentration risk in that case?
What are auditors going to be made responsible for next 🙁