In an update published on Tuesday, the ATO said there were a number of requirements trustees would need to meet when presenting an investment strategy to their auditor that complied with diversification requirements under regulation 4.09 of the SIS Act.
These included proof that they had considered “the risks of inadequate diversification within the context of their SMSF investment portfolio (for example, the risks associated with the fund’s investments in a diversified portfolio of shares is likely to be lower than that of another asset class, such as cryptocurrency)”.
The investment strategy also needed to consider “the making, holding, realising, and the likely return from their fund investments relating to their retirement objectives and expected cash flow requirements”.
In addition, trustees also needed to factor in how the liquidity of their investments would allow the fund to meet costs and pay benefits as members retired, and whether insurance should be held for one or more members, the ATO said.
It warned that penalties would apply for trustees whose auditors disclosed to the ATO that they had failed to rectify non-compliance with the diversification requirements.
In addition, the ATO recommended trustees seek assistance from a licensed adviser if they were having problems formulating a compliant strategy.
The update follows an SMSF Adviser report earlier in August that the ATO would write to over 17,000 trustees who have more than 90 per cent of their assets in a single asset class.
ATO aren’t going to tell trustees to diversify, they are just checking that they have documented they understand the risks from not diversifying, from what I can see. Its just another step in their plan to make SMSFs so difficult to manage that more people start winding up their SMSFs and less people establish them. The aim for the last 3 years has been to make if difficult for trustees to obtain good information without having to pay a fortune for advice services. Make the whole process cost ineffective to turn people away from SMSFs. This is just another nuisance for trustees to deal with. I’m sure there will be more to come. Its amazing that companies can build residential skyrisers without as much regulation as imposed on a SMSF trustee dealing with their own superannuation funds. Makes no sense.
To be fair a bit more documentation may have helped with some of the issues facing high rise units at present.
LRBA property attack in another way.
Given Labor lost the election and the hope of immediately killing off LRBAs. No doubt the Industry Funds will be helping their ATO / Govt buddies to think of any other possible way to limit LRBAs.
Industry Super HATE LRBAs SMSFs and this is just another form of attacks from the Labor stooges / Industry Funds.
I think everyone should calm down, including the ATO. The regulations never compel diversification.
(2) The trustee of the entity must formulate, review regularly and give effect to an investment strategy that has regard to the whole of the circumstances of the entity including, but not limited to, the following:
…
(b) the composition of the entity’s investments as a whole, including the extent to which they are diverse or involve exposure of the entity to risks from inadequate diversification;
As can be readily seen, there is no requirement to diversify, only that the risk from inadequate diversification are documented. If a letter was to be issued, I would challenge the legal basis for the letter; we have rule of law, and the regulator does not have discretion or otherwise regulated in a manner that is beyond the law. If the ATO thinks there is issue with the law, that is the realm of the Parliament.
Let’s assume a fund with 2 members both in their 80s, with 100% in cash/high interest savings account, with limited time horizon and most important aspect is capital preservation, I would like to see them get a letter. Similarly, if the ATO was to issue a letter to a fund that is 95% in say in real property with 20+ years to retirement, they will have fettered their discretion in issuing the letter and failed administratively. Question why issuing one and not the other?
Where do you draw the line? Hopefully the ATO is not becoming defacto financial advisers to SMSFs.
Also, 0-100% cannot be said to be no consideration. The trustees may have fully considered their circumstances, and determined that 0-100% is proper and fit their strategy. The legislation never states that this is an issue. I think the inference that 0-100% means that the trustee have not properly formulated an investment strategy cannot stand. Hopefully, the ATO is not now critiquing investment strategies. There are good doctors and their are mediocre doctors. You don’t prevent mediocre doctors from practising because s/he is not the best.
It all APRA regulates super fund are so great, and investment strategy superior, they would outperform the market consistently, which we all know they don’t and don’t even get close.
Where does that leave us? 100% in index based ETF?
All speculation until the letter are issued, and would love to see the language of the letter. Think ATO may be opening themselves up to some legal challenges if they are compelling diversification.
Great comments. Totally agree with you.
” Only that the risk from inadequate diversification are documented”. This seems to be the essence of this whole exercise.
Good to see the ATO picking up the granular detail of SISR 4.09. The ATO probably has good intentions but how long is a piece of string in an inquisitorial approach to examining:
“the risk involved in making, holding and realising, and the likely return from, the entity’s investments, having regard to its objectives and expected cash flow requirements;
the composition of the entity’s investments as a whole, including the extent to which they are diverse or involve exposure of the entity to risks from inadequate diversification;
Who is to say that a 100% investment in property during accumulation is a good or a bad investment? And how does the ATO decide whether SISR 4.09 has been adhered to?
Seems to me that this is another one of issues requiring documentation, similar to the trustees stating that they have considered insurance needs of members and having something documented.
Asset or Asset Class? It would be silly to have all your wealth tied up in a single piece of art or a single property but not so foolish for pension phase SMSF to have their total wealth invested in the single asset class of cash. A liquid asset class such as equities or stocks often comprise the bulk of a SMSF account with the balance held in cash. Are the ATO really focussing on ‘asset classes’ or investment in a ‘single asset’? Diversification across the single asset class of AUS shares would be common and I would argue that such diversification meets the ATO requirement. Of course it is wise, although not so easy, to invest in foreign stocks too but I would not like the ATO to start telling me what I should be invested in, in order to comply with their requirements. That is a step too far.
So what is the difference with a member of Australian Super industry fund choosing to place 100% in an “Australian Share” option or else 100% in one share in the ASX 300 as they are allowed to do? Any accountability for the trustees or are they given a free pass, as usual for union funds?
Generally most retail and industry funds have limits on lack of diversity too.
Looking at these key factors you could apply this to all SMSFs (which is where the ATO is probably going). An investment strategy is a forward looking document and needs to cover cash flow, insurances, diversification and the whole gamut of section 52B(2)(f). A backward produced investment strategy is not an investment strategy, nor is a 0% – 100% across each asset class. It is unlikely clients can do this themselves so it is important to get on the front foot and build it for them. This is important work at the start of the year and if a client does not want your help, get them to sign an indemnity form from any ATO or other legal action. Plus get your SMSF Trustee insurance up to date!
As a trustee of an SMSF, this borders on the ATO telling us what investments we should invest in. How broad can you be with a small investment pool? If my fund gets one of those letters, I’ll be pretty disgruntled and I’ll be demanding the ATO take liability for any losses incurred should they force more diversification than I’m prepared to accept being at retirement age but not yet having retired. (I know I’m fantasizing here. Won’t happen.). I can’t help thinking there is a hidden agenda here. Will they somehow expect us to perhaps invest in government infrastructure to diversify? Is that the plan? Are funds losing money that diversification will fix? If diversification is so important, why are they making property investment so difficult? What is the back story?
If an investment strategy considers the risks of non-diversification – and concludes that they are reasonable in terms of the members’ wishes – what possible penalty could a trustee incur?
Where does a government official have the right to determine a clients choice of funds.
Don’t see this as being anywhere near personal advice. Super law requires diversification; if trustees cannot show diversification, then why the issue with enforcing the law?
This borders financial advice telling or asking Trustees what they invest in. We do not know their personal circumstances.