SMSF auditors need to be proactive in contacting their trustee clients and their advisers to ensure a valid investment strategy is in place as they are being regarded as gatekeepers by the ATO, according to an SMSF strategist.
I Love SMSF director Grant Abbott said recent letters from the ATO to SMSFs that held a high proportion of assets in a single asset or asset class, as well as to the auditors of those funds, showed the latter had a key role to play in ensuring an investment strategy was in place.
Abbott said the letters sent by the ATO to trustees required that they show a written investment strategy, which had to meet a range of criteria, to their fund auditor.
“Now it is up to the auditor to determine if the strategy meets the requisite diversification, but it also puts them on notice that investment strategies are a key requirement and all investments need to be reviewed,” he said.
“The ATO is contacting auditors and making them gatekeepers for this work so auditors should push the button to get advisers and administrators onto creating the strategy.”
He said the case of Cam & Bear Pty Ltd v McGoldrick, in which the auditor was sued for investment losses, as well as changes to the Superannuation Industry (Supervision) (SIS) Act meant auditors were more likely to face legal action if a contravention of the fund took place and investments were made without a strategy.
He pointed out the Superannuation Industry (Supervision) (SIS) Act requires that a person must not contravene covenants contained in the governing rules of an SMSF, and investment strategies were considered a covenant, even when they were not included in the fund documentation.
“The danger is that if the covenant requires investments be made in line with the strategy and there is no strategy, then that is a breach of the covenant,” he said.
“The question is who did not resolve to meet that strategy and the act says that can be any person involved, such as the administrator, accountant, auditor or trustee.”
Additionally, he noted the act also allows that the person who suffered loss or damage due to the conduct of another person who had engaged in a contravention of the relevant sections of the SIS Act may recover those losses by action against the person involved in the contravention.
The act provided a defence against this action if it could be shown an investment strategy was put in place, he noted.
He also said the letters did not appear to be going to SMSFs that had a high concentration of investments in equities or cash, but mainly to those with property holdings.
This view has been confirmed by ATO superannuation assistant commissioner Dana Fleming, who stated on Linkedin in response to an earlier story on the letters published by selfmanagedsuper, that “98 per cent of the trustees we wrote to had invested in property”.
Fleming added: “The ATO’s actions arose out of concerns raised by the Council of Finanical Regulators (CFR) in their recent report noting that concentration risk in leveraged funds exposes individuals’ retirement savings to significant risk of loss in a property decline.”
The CFR report called for a ban on limited recourse borrowing arrangements for SMSFs, however, the federal government did not adopt the recommendation and will review their use in three years.