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SMSF Investment Strategy – Are you on the ATO Radar?

Are you on top of your SMSF investment strategy? When was the last time you looked over it? If it’s been a while, make sure you explore it as soon as possible, especially now that the Australian Taxation Office (ATO) has recently sent out a letter to over 17,000 SMSFs that hold greater than 90% of their total investments in a single asset class. They also highlighted the importance of trustees complying with regulation 4.09 (more details on that here).

So, what does this mean?

SMSF’s are required to have a documented investment strategy and comply with 4 main considerations: being Risk, Return, Diversification and Liquidity. Aaron McCracken, Director of MP Financial Planning explains further:

“The Superannuation Industry (Supervision) Act (SIS) requires trustees to formulate an investment strategy taking into account the whole circumstances of the fund including the following matters:

  • The risk involved in making, holding and realising – and the likely return from – the fund’s investments, with regard to its objectives and expected cash flow requirements;
  • The composition of the fund’s investments as a whole, including the extent to which the investments are diverse or expose the fund to risk from inadequate diversification;
  • The liquidity of the fund’s investments with regard to its expected cash flow requirements;
  • The ability of the fund to discharge its existing and prospective liabilities; and
  • Whether the trustees of the fund should hold a contract of insurance that provides cover for one or more members of the fund.

Common Scenarios

Commonly, people who have purchased a property (e.g. commercial premises) using their super fund, find themselves in a situation where the property makes up the vast majority of their asset.  There is nothing wrong with this per se, but it is important that the fund then seeks to diversify investments over time with future contributions and considers insurance to provide liquidity (e.g. a member dies and a death benefit needs to be paid).

Another common scenario is where a SMSF was set up in years past with funds initially held in cash and has remained as such for various reasons. This would be hard to justify in terms of meeting regulation 4.09, and aside from the compliance requirements, interest rates are at an all-time low. Therefore, trustees have and will miss out on growth and a much healthier account balance over time. Diversification can be achieved with a risk/return outcome to suit the individual trustees’ attitudes towards risk and stage of life. The important thing is to have considered these options and document a strategy that will meet your regulatory obligations, as well as help you achieve your financial goals and objectives.”

What Now?

If you are under the ATO’s microscope, there are potential fines for not meeting the regulation. It is unlikely a trustee would be fined purely for a lack of diversification, but more care, attention and seeking professional advice is advised to avoid actions in the future, and more importantly to ensure you are maximising your potential retirement funds!

For further information, or to organise an obligation-free meeting with one of our financial planning team, please contact us via our website or call us on 08 9301 2200.

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