ATO scrutinises self-managed super fund (SMSF) investment strategies

The Australian Taxation Office (ATO) has pushed 18,000 self-managed super fund (SMSF) trustees to improve their investment strategies or face costly penalties.

In September, the ATO wrote to the trustees of SMSFs that were understood to hold more than 90% of investments in a single asset or in a single asset class.

The ATO warned that those trustees’ investment strategies may not have complied with superannuation legislation and could be fined $4,200 if their strategies did not meet the requirements.

The tax office also wrote directly to the fund’s auditor to express concerns.

Division 4.09 of the Superannuation Industry (Supervision) Regulations 1994 requires that trustees must have an investment strategy that considers:

• diversification of investments
• risks involved in holding investments
• expected returns from investments relevant to retirement objectives
• liquidity (ability to pay liabilities such as pensions)
• insurance (e.g. holding of life insurance).

The ATO has targeted funds based on information that it received from the funds’ annual income tax returns for the 2017-18 financial year.

For example, a fund with a commercial property as its single investment has more than 90 per cent of its investments in a single asset class.

Why has the ATO written to trustees and auditors?

There have been two recent cases that have highlighted the importance of an appropriate investment strategy and the importance of diversification of investments.

In both cases, the trustees lost a large portion of their fund’s investments and legal action was taken against their advisers, including the fund’s auditor.

It is essential that trustees understand what they have invested in and that they have an appropriate investment strategy to support why those investments have been made.

Case 1: Cam & Bear Pty Ltd v McGoldrick [2018] NSWCA 110

Trustees invested in what they understood were cash and shares through an adviser. In reality, the investments were loans to a private company that could not be recovered.

Case 2: Ryan Wealth Holdings Pty Ltd v Baumgartner [2018] NSWSC 1502

Trustees invested in mortgage loans, however no mortgage loans existed and the investments could not be recovered.

The above cases highlight that the ATO is concerned that there is a greater risk in relation to a fund’s investments if they are not adequately diversified.

What should the trustee and the auditor do if they receive a letter from the ATO?

Trustees (and auditors) should review the fund’s investment strategy on an annual basis to ensure that it complies with the requirements of the superannuation legislation.

If a fund has the majority of its investments in a single asset or a single asset class, such as a sole commercial property, then having adequate documentation will be essential.

The trustees must document in the strategy that they have considered diversification and that all the requirements relevant to investment strategies have been complied with.

If any changes are required, this should be attended to immediately.

Get expert advice

If you’re a trustee and need help with your SMSF investment strategy, the team at LDB can help.

We can review the strategy in terms of legislative requirements and ensure it meets the necessary diversification rules to ensure the SMSF remains compliant.

LDB can also help prepare financial statements and annual returns for trustees and review the investment strategy for compliance matters in the same process.

For more information about SMSFs and compliance issues, give us a call on (03) 9875 2900 or fill in the form below to speak with one of our superannuation experts.