The ATO is set to contact thousands of SMSFs, that the tax office is concerned may be undiversified, about their investment strategies.
The ATO announced that it will be contacting around 17,700 SMSF trustees, and their auditors, at the end of August “where our records indicate the SMSF may be holding 90% or more of its funds in one asset or a single asset class”.
“We’re concerned some trustees haven’t given due consideration to diversifying their fund’s investments; this can put the fund’s assets at risk,” said the ATO.
“Lack of diversification or concentration risk, can expose the SMSF and its members to unnecessary risk if a significant investment fails.”
In the communication the ATO will ask the SMSF trustees to review their investment strategy, and “clearly document” their reasons for investment decisions.
Diversification is one of the things SMSF trustees have to consider as part of the investment strategy of their fund. SMSF trustees are required to “formulate, review regularly and give effect ” to an investment strategy, including consideration of risk, return, diversification, liquidity, the ability to discharge liabilities, and if the fund should hold insurance for members.
“We’ll also ask 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,” said the ATO.
SMSF trustees must be able to provide evidence to SMSF auditor: ATO
Update: The ATO has provided further information for tax professionals who may be contacted by their SMSF clients after receiving a letter from the tax office.
“Your trustee clients may contact you about this letter. To help your clients, remind them to check their investment strategy follows the law, and have their investment strategy ready to show to their SMSF auditor during their next audit,” says the ATO.
The ATO tells tax professionals that their clients must be able to give their SMSF auditor evidence of how their investment strategy meets the SIS requirements, including “risks of inadequate diversification within the context of their SMSF investment portfolio (for example, the risks associated with the fund’s investments in a diversified portfolio of shares is likely to be lower than that of another asset class, such as cryptocurrency)”.
“We will warn trustees that penalties may apply if their auditor tells us they have failed to rectify non-compliance with these requirements. If your trustee clients need help, let them know they should consider seeking assistance from a licensed SMSF advisor.”
Further update: The letters to SMSFs are being received, and include a prominent warning about the penalty for breaching the Operating Standards – which include the investment strategy requirement.