The investment strategies of Self Managed Superannuation Funds (SMSFs) are currently under scrutiny with the Australian Taxation Office (ATO), after they contacted roughly 17,000 SMSF trustees about the lack of diversity of their funds’ assets.
Those trustees that have been contacted by the ATO, hold 90% or more of the fund’s assets in a single asset or single asset class, and the fund also has a Limited Recourse Borrowing Arrangement (LRBA). The ATO is concerned that, “a lack of diversification or concentration risk, can expose the SMSF and its members to unnecessary risk if a significant investment fails.”
They are not suggesting that you must have diversity in your fund, as a lack of diversity might be the strategic decision of the trustees; however, the ATO is suggesting that as a trustee you need to be able to prove that the strategy chosen was an active decision to fund your retirement. Section 4.09 of the Superannuation Industry (Supervision) Regulations require that trustees “formulate, review regularly and give effect to an investment strategy that has regard to the whole of the circumstances of the entity.”
Moving forward, with the ATO highlighting this area as important, we recommend you revisit your SMSF’s investment strategy. To do this you can use the following questions, amongst others, to evaluate your investment strategy to ensure your SMSF’s assets are on track to fund your retirement:
- What are you trying to achieve in your fund for your members? i.e. what is your fund’s objective? This may be having a “decent retirement” or having “returns of CPI plus 3%”.
- What assets will you use to meet these objectives and what evidence do you have that these investments will help your fund to meet this objective? Why have you excluded other types of investments?
- How will the fund’s cashflow requirements (short, medium and long term) be met from those investments? Have you assessed the liquidity of the fund?
- Do any of your members need insurance? If yes, what type of insurance?
- What do you mean by diversification – by asset class, within asset classes or some other rule – and how has this requirement been met by your fund? Does this match with the funds’ original objective?
Once you have considered the above, you need to show how each particular investment or insurance product helps to achieve the funds objective and strategy. It is recommended this process be completed annually or when new assets are purchased, to confirm that the existing objectives and strategy are still valid, or with appropriate adjustments. Most importantly, you would need to be able to justify how you formulated your strategy if the ATO were to ask.