ATO contacts SMSF auditors over concentration risk concerns

“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.