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ATO letters not indicative of fund failure

SMSF investment strategy diversification

Trustees who received letters in the ATO probe into SMSF investment strategy diversification should not assume they are non-compliant, an SMSF expert says.

SMSF trustees with 90 per cent of their investments in a single asset or asset class, who have received a letter from the ATO, should not assume their investment strategy has breached the law, an SMSF expert has said.

Heffron SMSF Solutions head of SMSF technical and education services Lyn Formica said: “The ATO is not suggesting that these trustees have done anything wrong.  In fact, the ATO is unlikely to have ever seen the fund’s investment strategy.

“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.”

In a blog post on the Heffron SMSF Solutions website, Formica pointed out trustees who had received an ATO letter were required to document why they believed the fund’s chosen asset allocation was appropriate, but immediate action by the trustee would not be necessary.

“[Trustees] simply need to have this document ready for review by the fund’s auditor as part of the fund’s next audit,” she said.

She noted trustees who had not received a letter from the ATO but had SMSFs with a large proportion of their investments in a single asset or asset class would also benefit from reviewing their investment strategy documents.

“This does not necessarily mean they should rush to completely replace their investment strategy document, rather they could simply minute some additional context to supplement their existing documentation,” she added.

Highlighting the prevalence of standardised templates among SMSFs, she said the use of such templates was understandable and trustees receiving an ATO letter should not conclude the regulator no longer wanted investment strategy templates to be used.

“What the ATO is highlighting is that where a fund is taking action that is perhaps slightly unusual (for example, concentrating its investments in a single asset or asset class), it is prudent to consider whether the template alone is sufficient to ensure it reflects the serious consideration given by the trustees in making the decision,” she said.

“The ATO’s current action is perhaps a valuable reminder of one circumstance where expanding the normal documentation would be appropriate.”

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 and a number of SMSF sector specialists have cautioned advisers and trustees not to over-react to the letters, claiming an investment strategy ensured good funds management within a fund.

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