ATO contacts SMSF auditors over concentration risk concerns
The ATO is writing to 17,700 SMSF trustees who have more than 90 per cent of their assets in a single asset class and will also be contacting the auditors of these funds.
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.
Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.
Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia, and has reported extensively on technical strategy and legislative updates. Miranda has also directed SMSF Adviser's print publication for several years.
Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.