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Concerns overblown around ATO diversification review
Industry concerns about the degree to which trustees are being targeted in the current ATO review of highly concentrated funds’ investment strategy are somewhat overblown, but SMSF professionals would do well to have a keener focus on their clients’ investment strategy, according to an SMSF audit firm.
ASF Audits executive general manager of technical services Shelley Banton told SMSF Adviser that, while much of the industry had been up in arms about the ATO’s decision to warn more than 17,000 funds that they were at risk of breaching diversification rules in the SIS Act, this represented a very small proportion of the SMSF sector overall.
“The ATO states that approximately 17,700 letters were sent out to SMSF trustees. Based on the ATO’s latest figures of 598,249 funds as at March 2019, this equates to 2.95 per cent of all SMSFs,” Ms Banton said.
“As a result, it’s clear that the majority of SMSFs are in good shape in relation to the diversification requirement of regulation 4.09 [in the SIS Act].”
However, Ms Banton added that it was good practice for trustees and their advisers to regularly update their investment strategy, and that the ATO’s review had highlighted that the approach with regard to the strategy documents should be about more than tick-box compliance.
“Investment strategies are not just tick and flick documents but should be put in place with regard to the whole of the circumstances of the fund as outlined in r4.09,” she said.
“A regular review of the investment strategy is necessary, especially when a trustee’s personal circumstances change or when the economy weakens.”
Ms Banton said for those who had received a warning letter from the ATO — including a number of ASF Audits clients — and were concerned about their investment strategy, they could look at either redoing the strategy or providing a detailed addendum to the original strategy by their next audit.
“Best practice would be for the trustee to review and amend their original strategy, but we would accept an addendum or a minute if it is formalised, dated and signed by trustees, and gives more detailed information on the strategy,” she said.
“The essence of this particular ATO initiative is to encourage SMSFs with heavy asset concentration to include more detailed documentation around the reasons for investing in a single asset class, and we are trying to educate clients to provide sufficient evidence.”
Agree fully with annoyed CPA. The ATO are being heavy handed again. an investment strategy is not required to be in writing. nothing in the Regs that prescribe amounts concerning diversification. I feel we are getting closer and closer to a communist country where the State dictates what the citizen should do. Good bye to the freedoms Australians once enjoyed. Please ATO can I have permission to use the bathroom.0- There is nothing in the regulations that says an Investment Strategy even has to be in writing. It's a real push to make it harder and more costly to own an SMSF. What about assets owned outside super? Most people own property outside super so why would you own more in super doesn't that make you overweight in property???0
- I have no idea what you are referring to here... Many people feel comfortable with property as an asset class over other asset classes as they are familiar with it and don't necessarily have the money outside super to invest in the favorite asset class? The point raised can relate to any asset class it is more around what specifically are they looking for?? Wording to say in a minute "We acknowledge we arent sufficiently diversified however the asset classes invested in are those requested by the members?" Some assistance from Shirley or Dana or any other auditor in this case would be appreciated!0
- Dana perhaps you could confirm the expectations re the property scenario as you have responded to this article. What specifically would you want in addition to support the decision?Thanks Shelley - A very balanced response and captures our approach accurately.0
- Sounds like Labor's franking credit line - only 3% are affected so its not a big issue. The reality is its still a waste of time for these 3%. Better would be to remove the requirement for an investment strategy for SMSFs from the legislation. What's the issue the ATO is trying to solve? I mean a real issue, like SMSFs failing due to lack of diversification, not a 'computer says no' reason such as its in the legislation. If there's no issue, lets get rid of the red tape.0
- The underlying reason behind this is to address the "real issue" of lack of diversification, not the lack of an Investment strategy document. The Investment strategy (IPS) can be used to justify the thought process behind having a lack of diversification in an SMSF - i.e. a bank account and a single property, the main thing is that there needs to be a though process and the IPS is the documentation behind that.0
- Again looking for something more specific here in the wording which would satisfy the ATO!0
- Shirley, for a fund which has a property and cash only what additional evidence would you feel appropriate to support their decision to invest like this assuming the investment strategy ticks the boxes in all other aspects and the ranges are set to allow for this to occur?0
- Thanks Shelley - A very balanced response and captures our approach accurately.0
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