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ATO letters ensuring good fund management

ATO SMSF investment strategy

A specialist SMSF lawyer has described a decision from the ATO to scrutinise the investment strategy of certain funds as no cause for alarm.

The recent decision by the ATO to send letters to SMSF trustees asking them for information about their investment strategy is no cause for alarm and is just encouraging good fund management practices that should be in place as standard procedure, a specialist lawyer has said.

“This is really reinforcing the need for the industry to ‘upspec’ what is going on out there with regard to investment strategies, particularly those that have a whole range of asset classes where you can invest in each class from zero to 100 per cent,” DBA Lawyers director Daniel Butler said during his latest online webinar last Friday.

“[In these circumstances] further scrutiny is required and further prompting of your client, particularly if you are not licensed, for them to get appropriate input for an appropriate investment strategy.

“They need to do this properly and regularly, which means in broad terms at law every 12 months.”

Butler commended the ATO for undertaking the initiative and said the regulator “has tried to do a good thing” in focusing on SMSF investment strategy.

In addition, he offered an explanation as to why the ATO had decided to undertake such an exercise.

“Part of the reasoning [behind this] may have been the ATO is concerned about the property [and] share-market adjustments/corrections,” he said.

“Particularly with property markets having cooled off over the last couple of years, and banks retracting finance and LRBAs (limited recourse borrowing arrangements) out there, [it can be expected] that the ATO are naturally worried about funds with a more than 90 per cent allocation to one asset class.

“So you can see where it might have been driven.”

He conceded one legitimate downside to the exercise could stem from the regulator’s directive for the involvement of auditors in the review of the investment strategy.

This may lead to overcautious practitioners lodging auditor contravention reports unnecessarily, which could in turn lead to more scrutiny for the SMSF in question, he pointed out.

The ATO flagged its intention to send letters to 17,700 SMSFs with 90 per cent of their asset allocation in one asset or a single asset class in order to examine the investment strategies of these funds.

The first of these letters were received at the beginning of this month.

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