From the Editor

Ending the tick-a-box mentality

SMSF investment strategies

Letters from the ATO to SMSF trustees have raised questions about the use of investment strategies and how well those strategies have been applied.

At the end of August, the ATO sent out letters to 17,700 SMSF trustees in an effort to scrutinise how appropriate the investment strategies for these funds are.

When the letters were sent out, it was revealed SMSFs that held a single asset, namely property, in their portfolios were the ones targeted with a view to assess whether a suitable level of diversification in the investment portfolio had been employed.

On the surface, I found this a little strange. I couldn’t see how it was the ATO’s responsibility to monitor whether or not an SMSF investment portfolio was diversified enough. How would the regulator determine this? And there is anecdotal evidence demonstrating the great success of single-asset or asset-class funds.

The ATO then revealed the SMSFs that received letters all had acquired their single asset under a limited recourse borrowing arrangement. Everything then became a lot clearer. Basically the regulator is using the exercise to see if these trustees had established their funds as a result of inappropriate and perhaps illegal advice, possibly from a property spruiker, and scrutiny of whether the investment strategy in place supports holding a single asset is how it will be done.

It’s important to note the letters did contain the threat of an administrative penalty to the tune of $4200 should a breach of the Superannuation Industry (Supervision) (SIS) Act be detected and this threat has really made trustees sit up and take note – and not just those who got one.

Already stories are circulating from practitioners that SMSF trustees in general are reviewing their investment strategies to see whether there is any risk of non-compliance with the SIS Act. And this outcome really demonstrates the power of the ATO’s strategy and perhaps how similar campaigns can be used to break a certain consumer mindset.

It’s all very well to want to weed out the bad element of any industry, but from a more macro perspective it might be even more important to have individuals start taking some of their SMSF responsibilities more seriously.

What I’m referring to is the tick-a-box mentality with which certain aspects of running an SMSF are treated and the investment strategy certainly fits into this category. For too long the investment strategy has been seen as just a necessary evil in a lot of cases where trustees can put something in place quickly and be done with it, rather than treating it as a serious and important document.

If we narrow our focus to the 17,700 letter recipients, it would be interesting to find out how many of them actually have the required written investment strategy. I’ve a feeling it wouldn’t be 100 per cent of them. But all of them have now been shaken into action to realise formulating and documenting an SMSF investment strategy is not just about writing something down on a piece of paper to say you’ve satisfied this obligation.

And as I mentioned before, it’s not just this group that has begun to take the investment strategy requirement more seriously.

Right now we are only talking about the investment strategy, but what if this turnaround in mindset could be applied to something like the ATO trustee declaration? A quantum leap I know, but if this journey just started by the regulator can achieve such a result, the integrity of the sector will be strengthened infinitely.

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