Off the back of news last month that the ATO would write to almost 18,000 SMSFs that held 90 per cent or more of their funds in one asset, trustees have this week begun to receive their letters, which warn that they may be in breach of diversification requirements contained in the SIS Act operating standards.
A letter shared by Verante Financial Planning adviser Liam Shorte on Twitter shows trustees are being asked to review their investment strategy to ensure it provides evidence they have considered diversification, the risks associated with inadequate diversification, how the likely return from their investments measures up to their retirement objectives, the liquidity of their investments and member insurance needs.
“Have your investment strategy ready to provide to your SMSF’s approved auditor as part of your next audit. This will help your auditor form an opinion on your fund’s compliance with these requirements,” the letter reads.
It also warns that if the trustee’s auditor identifies non-compliance in any of these areas, the trustee could be liable for a $4,200 breach penalty.
SMSF Alliance principal David Busoli said with the onus heavily on auditors to root out substandard investment strategies, the industry was likely to take a conservative approach.
“Auditors have been targeted a bit in the last year for damages claims and the like, and they won’t be taking any risks in relation to investment strategy,” Mr Busoli said.
Mr Busoli added the letters were likely to cause administrative headaches for affected trustees, as some whose fund returns were due in October would have already had their accounts audited and may need to consider redoing the process if they were concerned about the compliance of their investment strategy.
“For those who have gone to audit, if the trustee receives a letter saying they’re one of the targeted funds, I would suggest they go back to their accountants and ask that the accounts be re-audited with a new investment strategy,” he said.
If trustees had changed auditors since the previous financial year, they would also need to communicate proactively with their new auditor to ensure they were aware of the requirement to take a closer look at their investment strategy, Mr Busoli said.
“There will be some clients who are using a different auditor than they did last year, so this year’s auditor will not be the one that’s getting the letter from the ATO,” he said.
I, as a trustee of my SMSF, know what is really going on. Every time the government comes up with these hair-brained ideas, I feel the strong urge to pull all my money out of the excessively red taped SMSF system because I’m 65. But then I think of the lost concessions. And then I realise the government is not really a fan of the SMSF vehicle and so may be hoping that excessive red tape might persuade people like me to simply give up and move assets back to higher taxing environments.
Generally superannuation forms part of a members retirement strategy, it is not a members entire retirement strategy. For example, members may run a business, hold property outside of super, hold direct shares outside of super, or even have multiple super funds. All of these components forms the members retirement strategy.
Therefore, to determine if a member is properly diversified you would need to look at their total circumstance.
Can the ATO provide a copy of their AFS License to all concerned before we go any further here .
Great to see so much discussion. We have had much feedback from SMSF Auditors concerned regarding the sub-standard investment strategies they see. It is the ATOs role as regulator to make sure Trustees are aware of their legal obligations. As correctly stated above Trustees can investment 90% of their funds in a single asset provided they can provide evidence of how they satisfied themselves they have met the requirements of Regulation 4.09. The letter simply outlines these requirements and ensures trustees are aware of the impact of failing to comply. If they have complied there is nothing to worry about. If they haven’t they still have time to sort out their investment strategy before their SMSF Auditor needs to file their ACR.
What irk’s me the most is that at the birth of SIS in 1993, when we were all working in the dark, APRA issued circulars about investment strategies, addressing diversification in particular.
APRA concluded that for a DIY fund (read SMSF) with only 2 related members (read Mum & Dad), that a single asset strategy e.g. real estate would be appropriate, were for instance the members have agreed to accept benefits paid in specie by transfer of property on retirement, and the trust deed allowed that.
Why is the ATO now inventing problems for themselves to solve?
Is it the case that we have too many overpaid public servants, sitting around inventing problems that don’t actually exist, in order to justify their own existence?
If an auditor expresses a subjective opinion opinion on whether assets are appropriately diversified would he/she be providing financial service advice and be in contravention of the Corporations Law and potentially be exposed to civil and criminal charges from ASIC and the courts. Are the ATO for Real! They are becoming a bunch of morons. Also I cannot see anything in the regulations that prescribe or quantify diversification requirements
Totally agree. Under the new licencing regulations an Accountant cannot raise the issue except from a compliance aspect and cannot make any suggestions as they would be financial advice.
The ATO is far exceeding its powers, they should stick to taxation.
The ATO is totally out-of-order with their letters to trustees and auditors regarding diversification.
SIS Regulation 4.09 states, in part, that “the trustee (of the fund) must formulate, review regularly and give effect to an investment strategy” having regard to “the composition of the entity’s investments as a whole, including the extent to which they are diverse …”.
Therefore, if the trustees/members believe that a strategy desiring investment in one single asset or class of assets suits their requirements for their retirement planning, and they have considered all the matters mentioned in Regulation 4.09 in that process, and have good reason for their decision, then the ATO or the auditor has no right to suggest that they are in breach of the Regulation.
For the ATO to use data entered in boxes on annual returns as a basis for sending these kinds of letters to trustees and auditors, threatening fines of $4,200, is intimidation in its extreme.
Why doesn’t the ATO carry out the audits of SMSFs if they believe that ASIC registered auditors are not doing the job properly? As an SMSF auditor I am insulted by the ATO’s methods.
The last time I checked the only information the ATO receives in relation to a funds investments is via the Annual Tax Return, so if a client hold 95% of its investments in Listed Shares (Section H, Label H of the 2019 SMSF Annual Tax Return), which may in fact have an underlying diverse range of asset classes (ie LIC’s) then they will receive this letter Or are the ATO focusing on those holding real property?
I don’t understand how the ATO thinks they have a right to tell SMSF trustees how to invest, and essentially try and force trustees to invest in shares etc. If SMSF trustees want to invest 100% in term deposits or real estate, so be it – that is their choice. It is all becoming very political and spending money with scare tactics on something such as this is a total waste of time. I really don’t see how anyone can be prosecuted ($4200 threat) for deciding to invest their own money in term deposits
What’s the issue if SMSFs were no longer required to have an investment strategy? People can hold the same investments in their personal name, and manage well without an investment strategy. A SMSF with a LRBA doesn’t only think of how it will make repayments because a basic investment strategy mentions cash flow. Same for retirees drawing a pension. If the world will work fine without them, lets cut the red tape.
Maybe the ATO and government should remove the speck of dust in their eye before trying to clean everyone elses. Worry about things that are important and critical to the economy. By all means weed out the ones doing the wrong thing but most SMSF’s are taking control of their own retirement.
The Cooper Review said re investment strategies either remove the requirement for SMSFs or beef up the legislation. The Review didn’t recommend either option, but did sat the current legislation achieves little. The ATO could benefit the community much more by removing Reg 4.09 from the audit report and ACR test it issues each year., rather than wasting Trustee time and money redoing strategies and auditors wasting time and money reviewing them.
“SMSF Alliance principal David Busoli said with the onus heavily on auditors to root out substandard investment strategies, the industry was likely to take a conservative approach.” The auditor job to to ensure an investment strategy comply with regulation 4.09(2). Please review the regulation; there is no requirement to diversify and if where the trustees have put their mind to it and document in the strategy, that is the end of it. This talk about “substandard”, there is no standard. It is not about who has the best investment strategy; it is who has the strategy that meets the regulations and also meet the needs/risk profile of the members.
The auditor’s job is to check the strategy complied with reg 4.09; diversification is not a requirement, and if inadequate diversification, say that in the strategy. Period.
On a number of occasions here I have warned of the possibility of a Trustee or Member recovering against an accountant, administrator, planner and auditor where the “purported investment strategy” does not meet the ATO requirements for a properly constituted investment strategy. A 0% – 100% range for all asset classes is not an investment strategy. Diversification is the thin edge of the wedge and recovery is not only over penalties but investment losses. Advisers be careful and take Davids advice redo all of your investment strategies now!
Is the ATO effectively asking the SMSF Auditor to give Investment/Financial Advice ?
Do all SMSF Auditors need to be Financial Planners ?
As an approved auditor I am not also allowed to provide financial product advice. So most specialist SMSF auditors are not financial planners at all which is a good thing. We cant give the trustees any advice but we must ask for a properly documented strategy that covers off the SIS requirements in R4.09. I think from ATO discussions here they just want to know why trustees have invested in 1 asset especially high risk assets which expose the members super if that investments goes under. So just sit with your accountants or advisors and tell them why you have invested like you have and they can put that all together for you in a properly documented strategy whih ticks all the boxes of R4.09.
The ATO does not need to know why the trustees undertook certain investments – all they need to know is when a breach of the Act has occurred.
It’s a continuing joke.
The ATO wants the trustees of an SMSF to demonstrate considerable thought having been put into formulating an investment strategy.
If you ask the average SMSF trustee to write an investment strategy, they will take their shoe off and throw it at you!
Even if a licensed financial planner drafts the strategy, the trustees still didn’t write it, they just signed it.
So now we will all scurry around and write beefed up strategies with nice motherhood statements, that trustees will sign but not read, just so a little tin God at the ATO with a bee in their bonnet about undergraduate level theories of diversification can sleep well at night, believing they have saved the taxpaying public once again?
How about we put some coffee and baked beans stains on it to look like it really was “formulated” around the kitchen table by mum & dad trustees?
Joke! No wonder Australia is going broke when we all forced to chase our own tails to placate public servants who produce nothing.
So SELF MANAGED is dead, does this mean wasting more time and money auditing a fund with only term deposits or initially 1 property need to waste more money on additional compliance if they have considered diversification and don’t want it? How about the Commissioner spends his time on the big end of town and fraudsters or are they too difficult for him?
I agree with David’s comment that the onus will heavily be on auditors to root out substandard investment strategies. However with the proliferation of substandard templates in the industry, coupled with the lack of trustee interest in this document, it will not be an easy task. It would be great if auditors had some assistance from the professional bodies in raising the standard.