Tactical Super director Deanne Firth told sister title SMSF Adviser that the ATO’s approach to its diversification review had unduly scared clients, who were often concentrated in one asset because of their concerns around taking risks in investment.
“The ATO letter sent to trustees finishes with, ‘You should be aware that if your auditor identifies you have failed to rectify any non-compliance with the requirements listed above, this could result in the imposition of abovementioned penalties’,” Ms Firth said.
“The ‘fail to rectify’ implies their current investment strategy is wrong, but there are many reasons trustees have more than 90 per cent of their assets in a single asset class.”
Ms Firth gave examples of recent clients who may fall under the ATO’s sights in its diversification review, including a couple who had purchased their business premises in their SMSF when it came up for sale and an elderly trustee who held her entire assets in cash out of fear of sharemarket declines following the global financial crisis.
“Many funds with 90 per cent in one asset class have considered diversification and their investment strategies do not breach regulation 4.09,” she said.
“Regulation 4.09 asks you to consider diversification, not to be diverse. Similar to the insurance consideration, an SMSF doesn’t have to hold an insurance policy for its members, it just has to consider whether they should.”
Ms Firth said a key concern for auditors in relation to the strategy review was that while clients were coming to them with questions around the viability of their investment strategy, they were not legally able to comment on whether the client’s asset allocation was sufficient.
“If you don’t have a financial services licence, you can only provide factual information about investments and strategies,” she said.
“You cannot prepare or review an investment strategy for an SMSF. This means trustees cannot bring their investment strategy into their accountant for them to review to see if it complies.”
She said a best practice approach for auditors involved considering that diversification needed to be covered off in an SMSF the same way that insurance had been when it was under the regulatory microscope several years ago.
“I believe all that is required is a paragraph similar to what was added for the insurance consideration, so that it is clear that in preparing the strategy, the trustee has considered diversification, the risk of inadequate diversification, the likely return from investments, cash flow considerations and liquidity,” Ms Firth said.
“The legislation doesn’t actually require a written investment strategy, it just requires the trustees to ‘formulate, review regularly and give effect’.”
The ATO’s view
ATO assistant commissioner Dana Fleming said that while the Tax Office was not trying to dictate investment strategy, it had a duty as a regulator to ensure SMSFs are aware of their legal responsibilities.
“Our letter simply reminds trustees of certain legal obligations they voluntarily signed up for. That is, to have ensured they have understood and documented how they are comfortable their investment strategy is suitable for their retirement goals and the risks of inadequate diversification, risk and return and liquidity,” Ms Fleming said.
“The level of reaction to a long-time obligation is even more concerning if it indicates trustees have not been previously properly informed of their obligations or have substandard strategies for their very important life stage of retirement.
“I would suggest that it’s very hard to evidence this without a written investment strategy, and any auditor worth their salt will ask for one — so trustees would be best served to have their investment strategy in writing.”