Are all your SMSF eggs in one basket?

The ATO is concerned that, “a lack of diversification or concentration risk, can expose the SMSF and its members to unnecessary risk if a significant investment fails.”

 

This does not mean that you must have diversity in your fund. A lack of diversity might be a strategic decision by the trustees but you need to be able to prove that the strategy was an active decision. Section 4.09 of the Superannuation Industry (Supervision) Regulations require that trustees “formulate, review regularly and give effect to an investment strategy that has regard to the whole of the circumstances of the entity.”

To do that you need to:

  • Recognise the risk involved in the investment, its objectives and the cash flow of the fund
  • Review the diversity of the investment strategy (or otherwise) and the exposure of a lack of diversity
  • Assess the liquidity of the investment and cashflow requirements of the fund
  • Assess the ability of the fund to discharge its liabilities, and
  • Review and have in place appropriate insurance cover for members and assets

Importantly, you need to be able to justify how you formulated your strategy if the ATO asks.

The 17,700 people being contacted by the ATO hold 90% or more of the fund’s assets in a single asset or single asset class.

Property is one of the problem areas the ATO is looking at. With property prices at a low point, the asset value of many funds has diminished.

In addition, debt taken on by SMSFs has significantly increased. The number of SMSFs using Limited Recourse Borrowing Arrangements (LRBAs) to purchase property has increased significantly from 13,929 (or 2.9% of all SMSFs) in 2013, to 42,102 (or 8.9% of all SMSFs) in 2017. For SMSFs that have purchased property through an LRBAs, on average, these LRBAs represent 68% of total assets of the funds.

LRBAs are most common in SMSFs with a net fund size (total assets excluding the value of the amount borrowed) of between $200,000 and $500,000. In 2017, the average borrowing under a LRBA was $380,000 and the average value of assets was $768,600.

Need some help with an SMSF?

We’re here to help, don’t let your questions go unanswered. Complete your query below and we’ll respond.

4 + 15 =

Latest Blog Articles

Tax Time Targets

With tax season almost upon us the Australian Taxation Office (ATO) has revealed its four areas of focus this tax season. This article covers, in depth, what these are.

read more

EOFY is coming — Have you thought about …

Whether you’re nearing retirement, a high-income earner looking to reduce your taxable income, or you’re on a lower income and looking for ways to maximise your super contributions; there are a few things you can consider at tax time. Read this article to finish this financial year on the right foot – EOFY is coming – Have you thought about …

read more

What do I need to know before investing in property?

Property can be an exciting element to add to your investment portfolio. But aside from the initial purchase, what other ongoing expenses may you find yourself paying? And which of these expenses can you claim as a tax deduction? – What do I need to know before investing in property?

read more

The material and contents provided in this publication are informative in nature only.
It is not intended to be advice and you should not act specifically on the basis of this information alone. If expert assistance is required, professional advice should be obtained.

 

Liability limited by a scheme approved under Professional Standards Legislation