Does your SMSF investment strategy meet diversification requirements?’September 19, 2019

It is interesting to see the ATO has provided further clarity around their August 2019 letter to 17,700 SMSF trustees re “Does your SMSF investment strategy meet diversification requirements?”. The following is the note from the ATO:

At the end of August the ATO contacted about 17,700 self-managed super funds (SMSF) and their auditors where 2018 SMSF annual return data indicated these SMSFs may be holding 90% or more of their retirement savings in one asset or a single asset class. The SMSFs contacted also used a limited recourse borrowing arrangement (LRBA) to acquire the single asset or asset class. In 99% of the SMSFs contacted, the asset in question was property.

While nearly a third (180,000) of the total population of SMSFs have invested 90% or more of their retirement savings in a single asset or asset class, those SMSFs contacted were selected based on a report to government in February by the Council of Financial Regulators and the ATO. The ‘Leverage and Risk in the Superannuation System’ report highlighted concerns that less diversified SMSFs with LRBAs are exposed to asset concentration risk, which in the event of a fall in the asset’s price could lead to a significant loss in the value of the fund.

ATO were concerned that these SMSF trustees may not have given due consideration to diversifying their fund’s investments and the risks associated with a lack of diversification when formulating and reviewing their investment strategy.

While a trustee can choose to invest 90% or more of their retirement savings in a single asset or asset class, concentration risk combined with leveraged borrowings, can expose the SMSF and its members to unnecessary risk if a significant investment fails.

ATO asked trustees to review their investment strategy and clearly document the reasons behind the investment decisions.

ATO also asked trustees to have their documentation ready for their SMSF’s approved auditor for their next audit to help the auditor form an opinion on the fund’s compliance with these requirements.

Also refer the Chartrered Accountants note here >>>The ATO SMSF investment strategy letter – Not the ogre it appears to be _ CA ANZ

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