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SMSFs in ATO probe used LRBAs

ATO letters LRBA

The ATO has confirmed the SMSFs contacted via letters as part of its recent probe into the diversification of fund investment strategies used a limited recourse borrowing arrangement (LRBA) to acquire their single asset or asset class.

In an update on its website, the SMSF regulator said: “At the end of August we contacted about 17,700 SMSFs and their auditors where 2018 SMSF annual return data indicated these SMSFs may be holding 90 per cent or more of their retirement savings in one asset or a single asset class.

“The SMSFs contacted also used an LRBA to acquire the single asset or asset class.

“In 99 per cent of the SMSFs contacted, the asset in question was property.”

It stated of the 180,000 funds that have invested 90 per cent or more of their retirement savings in a single asset or asset class, those that received a letter from the ATO were selected based on a report to the federal government in February by the Council of Financial Regulators and the ATO.

“The “Leverage and Risk in the Superannuation System” report highlighted concerns that less-diversified SMSFs with LRBAs are exposed to asset concentration risk, which in the event of a fall in the asset’s price could lead to a significant loss in the value of the fund,” it said.

“We were concerned that these SMSF trustees may not have given due consideration to diversifying their fund’s investments and the risks associated with a lack of diversification when formulating and reviewing their investment strategy.”

Earlier this week, an SMSF technical expert suggested LRBAs were a target of the ATO’s scrutiny as part of its inquiry into SMSF investment strategies.

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