The ATO is in the process of sending letters to trustees if their SMSF is holding 90% or more of its funds in one asset or a single asset class. Lack of diversification can expose an SMSF and its members to unnecessary risk if a significant investment fails, which is why the ATO is asking trustees to review their investment strategy and clearly document the reasons behind their investment decisions. Most commonly, this letter is being sent where an SMSF owns property.
Trustees will need to provide their SMSF auditor with evidence they have considered the following:
the diversification of fund investments;
the risks of inadequate diversification within the context of their SMSF investment portfolio. For example, that the trustees believe the risks associated with their fund’s investment in a single commercial property with a related tenant is likely to be lower risk than other types investments;
how the making, holding, realising, and expected return from their fund investments relates to their retirement objectives and expected cash flow requirements;
the liquidity of their investments in relation to allowing the fund to meet the day to day costs and pay benefits when members retire;
whether insurance cover should be held for one or more members.
Additionally, there are other factors you could have considered that your fund’s auditor may not be aware of, so it’s important to document these too. For example, the trustees may have considered that they have another super fund, or that they personally hold a wide investment portfolio of shares & trusts; so together with the SMSF’s investment in property, it provides an overall diversified portfolio for their retirement. As long as the trustees have documented their reasoning & their strategy according to the requirements above, then the trustees have met their requirements according to the SIS Act.
Should you receive the letter & take no steps to update the investment strategy or document your reasoning behind the fund’s investments, then the ATO could issue a penalty of up to $4,200 per SMSF trustee.
Finally, please note there is no requirement to respond directly if you receive the ATO letter, you just need to ensure you have the correct investment strategy documentation on file.