Are all your SMS Fund eggs in one basket?

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

Property is one of the problem areas the ATO is looking at. With property prices at a low point, the asset value of many funds has diminished.

In addition, debt taken on by SMSFs has significantly increased. The number of SMSFs using Limited Recourse Borrowing Arrangements (LRBAs) to purchase property has increased significantly from 13,929 (or 2.9% of all SMSFs) in 2013, to 42,102 (or 8.9% of all SMSFs) in 2017. For SMSFs that have purchased property through a LRBAs, on average, these LRBAs represent 68% of total assets of the funds.

If you have any questions regarding your SMSF, please feel free to phone our friendly team at Acumon on 4931100.