The investment strategies of Self-Managed Superannuation Funds (SMSFs) are under scrutiny with the Australian Taxation Office (ATO) contacting 17,700 trustees about the lack of asset diversity.

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.”

This does not mean that you must have diversity in your fund. A lack of diversity might be a strategic decision by the trustees but you need to be able to prove that the strategy was an active decision.

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.” To do that you need to:

  • Recognise the risk involved in the investment, its objectives and the cash flow of the fund
  • Review the diversity of the investment strategy (or otherwise) and the exposure of a lack of diversity
  • Assess the liquidity of the investment and cashflow requirements of the fund
  • Assess the ability of the fund to discharge its liabilities, and
  • Review and have in place appropriate insurance cover for members and assets

Importantly, you need to be able to justify how you formulated your strategy if the ATO asks.

The ATO is not suggesting that trustees have done anything wrong.  They are simply asking trustees to review their investment strategy and, given the fund’s apparent asset concentrations, make sure the strategy complies with the law.

What do you need to do if you receive this letter?

If you received the ATO letter you should consider reviewing your fund’s current investment strategy to ensure you have considered the fund’s chosen asset allocation and ensure it is appropriate by taking into account the factors listed above.  This may be in the form of an update to the fund’s investment strategy, an addendum to the investment strategy or a minute etc.

There is no need for immediate action necessary.  You simply need to have this document ready for review by the fund’s auditor as part of the fund’s next audit.

Contact Waterford Financial Services directly on (02) 4940 2800 for further information or further guidance.

The material and contents provided in this publication are informative in nature only.  It is not intended to be advice and you should not act specifically on the basis of this information alone.  If expert assistance is required, professional advice should be obtained.