The ATO has released guidance stating an SMSF investment strategy that specifies asset ranges of zero to 100% per cent within an SMSF investment strategy document is “not a valid strategy”.
Their view is that the investment strategy must be tailored and specific to the relevant circumstances of the SMSF. The guidance is based on the outcomes of the letter recently sent by the ATO to nearly 18,000 SMSF trustees who have more than 90% of their fund’s assets in a single asset class – namely property.
While there are no restrictions under general law prohibiting SMSFs from investing in a single asset, there are measures in the Superannuation Industry (Supervision) (SIS) Act and Regulations that require SMSFs to formulate, regularly review, and give effect to an appropriate investment strategy, and rules as to what considerations the strategy must address.
There may be good reasons as to why SMSF trustees choose to invest a majority share of their retirement savings in one asset or asset class, such as property. For example, a member may have a public offer superannuation fund that is predominately invested in shares and/or cash/fixed interest, so overall the member’s superannuation portfolio may take on a more balanced approach.
The ATO’s views have sparked much debate about whether the ATO has the power to assess the validity of an SMSF investment strategy and the chosen investments in an SMSF.
Although the ATO is not responsible to determine whether an SMSF investment strategy is appropriate for SMSF members, the ATO can assess whether than SMSF has followed the investment strategy rules and determine whether the correct process has been followed.
Instead, it is the SMSF auditor’s responsibility to check that:
- An investment strategy was in place for the fund that considered the factors stated in SIS Regulation 4.09 (ie. investment and diversification risk, liquidity risk, whether trustees should hold insurance cover for one or more members of the fund, etc.)
- The fund’s investments during the year were in accordance with the strategy, and
- The strategy had been reviewed at some point during the year.
Where SMSF trustees do not comply with the investment strategy requirements, the SMSF auditor may need to notify the ATO about the breach by lodging an auditor contravention report.
Thus, all SMSF trustees, and particularly those whose funds where assets may appear to lack investment diversification and liquidity, should consider having a well-documented investment strategy that:
- Provides the decision making rationale behind the investment choice/s
- States trustees have considered the risks associated with a lack of diversification, and
- Includes details on how diversification and liquidity will be managed (eg. by including a cash flow plan and a risk assessment analysis, etc).
The ATO has updated its website with some FAQs around the SMSF investment strategy requirements. Click here for more information.