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ATO letters could be targeting LRBAs

ATO letters could be targeting LRBAs

Limited recourse borrowing arrangements (LRBA) may be the target of ATO scrutiny resulting from its recent letters to SMSFs about investment strategies.

ATO letters issued recently to SMSF trustees examining their investment strategies regarding diversification could potentially be seen as an attack on funds using limited recourse borrowing arrangements (LRBA), an SMSF technical manager has warned.

SuperConcepts SMSF technical support executive manager Nicholas Ali said: “The ATO is sounding an alert on SMSF investment strategies, which the cynic in me believes is being done to deliberately target funds with LRBAs.”

In a blog post on the SuperConcepts website, Ali said the recent ATO letters encouraging SMSFs to consider diversification in order to lower risk was less well-intentioned than it seemed.

Citing a recent media interview ATO superannuation assistant commissioner Dana Fleming conducted, he said the SMSF regulator had expressed concern 41 per cent of SMSFs with LRBAs held 90 per cent of assets in a single class, with 62 per cent of funds with LRBAs holding 80 per cent of assets in one class.

He noted the ATO’s reminder to trustees of the need to demonstrate the appropriateness of their investments and comply with Superannuation Industry (Supervision) Regulation 4.09 meant it was worth focusing on how LRBAs could satisfy the elements of liquidity as well as the diversification requirements of the regulations.

In addition, he said in his opinion the tone of the letter was a little “heavy-handed and officious” by referring to the associated penalties should a fund be found non-compliant with the investment strategy requirements.

However, despite pointing out some of the perceived flaws associated with the regulator’s actions, he acknowledged a positive aspect to the the letter-writing initiative.

“While the letter appears to target SMSFs with LRBAs, the fact that trustees are being reminded of their duties and obligations is prudent, and the ATO’s campaign could be seen as a timely opportunity for an investment strategy review,” he noted.

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