ATO Warns SMSF Trustees to Diversify and Formulate Good Investment Strategies

The Australian Taxation Office (ATO) has issued letters to 17,700 SMSF trustees and their auditors reminding them of their responsibility to ensure diversification and liquidity in their investment strategies.

The Office has warned that it will fine SMSF trustees who have 90 per cent or more of their retirement savings invested in a single asset class, which is often property.

The ATO writes, “Our records indicated that your SMSF investment strategy may hold 90 per cent or more of its funds in an asset, or single asset class.”

The letter told trustees they are “at risk of not meeting the diversification requirement” as required by the law and which will make them liable for an administrative penalty of $4200.

The letters are part of the ATO’s campaign directed at Self Managed Super Funds (SMSF) with limited recourse borrowing arrangements (LRBA) and where the SMSF trustees borrowed money to buy a single asset.

The February report by the Council of Financial Regulators highlights SMSFs with LRBAs.

The report, co-written by the ATO, expressed concerns over the “prevalence of property as the main asset purchased under an LRBA, most commonly by low-balance SMSFs who have little investment diversification and high loan to value ratios (LVRs), making these funds particularly susceptible to shifts in the property market”.

SMSF with under $500,000 funds are considered low-balanced SMSF.

The Australian Securities and Investments Commission (ASIC) also reported that one-stop property shops are promoting “high risk” strategy, urging naive investors into using SMSF “primarily as a vehicle for investing in property itself, with little regard for superannuation as a form of retirement income”.

The report shows the value of assets held under LRBAs has increased from $8.8 billion in June 2013 to $38.9 billion in June 2018, and that LRBAs were most common in smaller SMSFs.

“Less-diversified SMSFs with LRBAs are thus exposed to asset concentration risk, which in the event of a fall in the asset’s price, could lead to a significant loss in value of the SMSF.”

“Further, this high degree of asset concentration could exacerbate risks to SMSF members if personal guarantees are involved, leading to a loss of personal wealth beyond superannuation,” the report stated.

It is important to note that the ATO does not have a prudential supervisory role in controlling SMSF investments. Rather, its function is to ensure SMSF trustees act in accordance with the superannuation law.

Today, the ATO is seeking assurance that SMSF trustees are formulating sound investment strategies with risks, liquidity, and diversity of the portfolio all considered.

It’s always a good practice to diversify your portfolio and spread your investments across several asset classes and markets. This ensures that even if one sector performs badly, the others will still provide earnings and capital growth for you.

If you need help planning your retirement and designing, structuring and executing investment strategies, contact Sphere Accountants & Advisors today. We can help you grow your portfolio and secure your wealth not just for you but your family as well.