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SMSFs receive ATO letters querying investment strategy

SMSFs ATO letters investment

SMSFs have begun to receive letters from the ATO seeking details over their investment strategy and flagging penalties for a lack of action on the issue.

The first letters sent by the ATO to SMSFs over concerns about the lack of diversity in the latter’s investment strategies have been received, flagging a $4200 penalty for funds that fail to meet the required diversification standards.

A copy of a letter, which has been posted online, reminds trustees they are “ultimately responsible for ensuring your investment strategy meets the requirements under the law” and points to diversification requirements outlined in the operating standards of the Superannuation Industry (Supervision) Regulations 1994.

“You could also be liable for an administrative penalty of $4200 if your investment strategy fails to meet these requirements,” the letter stated.

Verante Financial Planning director and SMSF specialist adviser Liam Shorte said the inclusion of the penalty, which appears in the third paragraph, had been confusing to some trustees.

“I have had clients ask if they are in trouble, and it would have been preferable to see a call to action before the penalties, but this is the way the ATO writes these letters and this is the first time we have seen this type of campaign,” Shorte said.

The ATO letter also indicates the SMSF regulator is aware of a fund’s current investment holdings and will be tracking whether any changes are being made by trustees by drawing on auditor’s reports to confirm compliance with the regulations.

In the opening paragraph of the letter, the ATO stated its records indicate the SMSFs that received a letter may hold 90 per cent or more of their funds in one asset, or a single asset class, and goes on to call on trustees to review their investment strategy to ensure it complies with the law.

Further, the ATO has requested trustees to present the strategy to the SMSF’s auditor, “which will help your auditor form an opinion on your fund’s compliance with these requirements”, who will in turn be required to disclose any lack of action where it is required by trustees.

“We will also be writing directly to the auditor of your fund to notify them of our concerns,” the letter said.

“You should be aware that if your auditor identifies that you have failed to rectify any non-compliance with the requirements listed above, this could result in the imposition of the above-mentioned penalties.”

Shorte said the reference to auditors in a letter to trustees means it was likely the latter would be required to ask more questions at the next fund audit which in turn could be used to target other issues.

“This type of examination is not a bad thing and may identify funds that are over-reliant on property or those set up via one-stop shops as well as auditors who have signed off on funds with large single assets without seeking further information,” Shorte said.

“It does set in stone that from now on the SMSF investment strategy will be very important.”

In an online update in mid-August directed at tax professionals, the ATO stated the investment strategy had to meet the retirement objectives and cash-flow requirements of the fund, and professionals could help trustees check the strategy and show it to their SMSF auditor during the next audit.

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