SMSF investment strategy commentary “misleading”: CAANZ

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Some of the commentary around the ATO writing to SMSFs about their investment strategy is incorrect or misleading, says Chartered Accountants Australia & New Zealand, which also recommended the ATO not refer to penalties in the letters.

The ATO recently sent letters to around 17,700 SMSF that had more than 90% of their balance invested in a single asset class.

Chartered Accountants Australia & New Zealand (CAANZ) says some of the commentary around these letters has been “incorrect or, at best, misleading”.

The accounting body says that SMSF trustees “can’t argue” they are unaware of the investment strategy requirements as they’ve signed the trustee declaration and sign the annual return each year.

CAANZ says it gave the ATO “extensive comment” on the letters, after being provided with drafts under embargo. This included removing the references to administrative penalties of $4,200 in the letters.

“The ATO however was concerned that some trustees might ignore the communication (or later complain) if the letter did not sound an adequate warning about the legislative requirements and the penalties that could apply,” said Tony Negline, CAANZ Superannuation Leader.

Negline disagrees with comments in the media that the ATO has taken steps into financial planning, noting the tax office is a compliance regulator.

“Auditors are asked to state that the investment strategy is correct for a fund – they are asked to verify that the strategy provided to them meets the requirements of Reg 4.09 (that is, it clearly takes into account all the points required including diversification) and that the strategy has clearly been implemented by the trustee when operating their fund.”

“They are not asked to provide retail financial product advice (as defined in the Corporations Act) to SMSF trustees.”

Negline also disagrees that the “vast majority” of SMSFs have 90% of their assets in one asset class or a single asset.

The latest available ATO statistics show that almost 30% of SMSFs have 90% invested in a single asset class.

Given recent court cases, pro-forma investment strategies are unlikely to be enough, though the approach taken by accountants and SMSF administrators depends on if they are licensed to give financial advice or not.

“To date, in many cases, the investment strategy document piece has been a box ticking exercise with the use of pro-forma documents that contain 5 or 6 investment classes and allowable ranges between 0% and 100%.”

For SMSF auditors, Negline says: “For many years your job has been to check that the fund has an investment strategy which takes into the five limbs of Reg 4.09 and that the strategy has been implemented – that is, investments or insurance selected by the trustees line up.”

“SMSF auditors are not asked to judge if the strategy is suitable for the particular fund or if particular investments are suitable overall.  Their primary focus is compliance with Reg 4.09 – that is, tell me what you’re trying to achieve and then show me how you have gone about putting those thoughts into concrete action.”

SMSF auditors will find this task easier if the investment strategy is in writing.

“Whilst strictly true that investment strategies do not need to be in writing it would be difficult for an auditor to validate an investment strategy complies with Reg 4.09 that is not in writing.”

The letter from the ATO say that SMSF investment strategies would “ideally” be in writing.

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