How does your SMSF’s Investment Strategy stack up?

The ATO recently contacted almost 18,000 SMSF trustees who hold more than 90% of their investments in one asset, or in a single asset class. This campaign is designed to drive trustees to consider their investment strategy, diversification and asset make up.

Why?

The ATO is taking this action as they are concerned that in these circumstances the Fund’s Investment Strategy may be at risk of breaching Regulation 4.09 of the Superannuation Industry (Supervision) Regulations 1994 (SISR).

What is Regulation 4.09 of SISR?

In simple terms, this is a set of legal requirements to be met by a fund’s investment strategy. As per the ATO correspondence, they have directed SMSF Auditors to see documented evidence from the SMSF trustee which demonstrates the following was considered:

  • diversification of the fund’s investments and the risks associated with inadequate diversification; and
  • other relevant factors were considered such as the risk involved in making, holding and realising and the likely return from the investments having regard to the fund’s objectives and expected cash flow requirements; and
  • the liquidity of the SMSF’s investments, having regard to its expected cash flow requirements and ability to discharge its existing and prospective liabilities; and
  • whether the trustees considered holding insurance for one or more of the members.

What does this mean for trustees of SMSF’s?

While the ATO’s communication may have caused some concern in the industry, it is important to understand the reality is trustees are unlikely to be penalised unless they cannot show the requirements of the Regulation have been adhered to. This means as long as trustees have considered all of the elements in the regulation within a written Investment Strategy, there is no power for the ATO to dictate what a fund can hold by way of assets, nor can they dictate the amount a fund can hold in one particular asset or asset class.

Next steps?

Should you receive one of these letters from the ATO, it is important not to panic. We recommend you contact your Findex SMSF Adviser who will check your SMSF has a documented Investment Strategy in place and review the document against the legislative requirements as noted above.

If you have any concerns regarding this matter, or any other SMSF matters, please contact your Findex SMSF Adviser who can assist in answering any questions you may have and help you to sleep easy at night.