Recently the ATO issued a warning letter to around 17,700 SMSF trustees highlighting the concerns regarding lack of diversification with the threat of an administrative penalty of $4,200 being applied if your SMSF fails to meet these diversification requirements under the current superannuation laws.

Why have you been sent the ATO letter?

With the ATO’s data collection from the lodgement of over 17,000 SMSF annual tax returns, they have identified self-managed super funds where more than 90% of the fund’s investments are held in a single asset or asset class.

The ATO’s basis for the release of this letter is the belief that some SMSF fund trustees are not preparing compliant investment strategies that consider risk, return, diversity and liquidity within the fund’s investments.

The most common scenario for the receipt of this letter is where self-managed super funds have purchased direct property (with or without a loan) as part of its investment strategy. Additionally, SMSF Auditors have also received these letters to prepare for when they audit your super fund next to look closely at the fund’s investment strategy.

Will you be fined $4,200?

As long as the SMSF holds a current and compliant investment strategy as part of the funds compliance standards then no penalties will be applied. Your SMSF Auditor looks closely at the funds investment strategy and supporting documentation (trustee minutes etc) to ensure that they meet the superannuation regulations. If these documents fail to meet, your auditor will notify the trustees in order to rectify prior lodgement of any annual tax returns and to avoid an audit contravention report being issued to the ATO.

What to action?

As this is high on the ATO’s radar and consequently comes with high penalties, it is imperative that your SMSF investment strategy complies with the law to prevent any penalties being applied. The SMSF trustees need to clearly outline the investments held in their fund with detailed evidence. The following 3 steps are recommended when reviewing your SMSF investment strategy:

  • Step 1 – review the existing investment strategy to see if evidence exists within the strategy where the trustees have considered risk, return, diversity and liquidity.
  • Step 2 – If the existing strategy doesn’t contain the relevant indicators (as listed in Step 1) required, the SMSF trustees will need to review the existing investment strategy and update it where necessary.
  • Step 3 – There are some cases where the funds actual investments don’t match the strategy outlined in the investment strategy. If this is the case in your situation, then the trustees must either amend the strategy or alter the investments.

Will the ATO force my fund to diversify?

The short answer to that question is no. Under Superannuation Industry Regulation 1994 (Reg 4.09(2)(b)) it doesn’t force an SMSF investment strategy to be diversified but it doesn’t force SMSF trustees to specifically consider diversification of their fund.

Basically, the onus is on the SMSF trustees to diversify within their funds. If they choose not to diversify, then they must justify the risk of investing in one asset or one asset class and this needs to be reflected in the investment strategy as part of the super funds supporting documents.

The ATO cannot force an SMSF trustee to diversify their investments but the onus on documenting why your SMSF is not diversified is on you.

If you are unsure if your investment strategy is compliant or require assistance in updating your investment strategy, please contact your Business Advisor at Mulcahy & Co Sunshine Coast.