On 9 August 2019 the ATO issued the following Alert regarding the management of self-managed superannuation funds (SMSFs):
“At the end of August we’ll contact about 17,700 self-managed super fund (SMSF) trustees and their auditors where our records indicate the SMSF may be holding 90% or more of its funds in one asset or a single asset class.
We’re concerned some trustees haven’t given due consideration to diversifying their fund’s investments; this can put the fund’s assets at risk.
Lack of diversification or concentration risk, can expose the SMSF and its members to unnecessary risk if a significant investment fails.
We’ll ask trustees to review their investment strategy and clearly document the reasons behind the investment decisions. We’ll also ask trustees to have their documentation ready for their SMSF’s approved auditor for their next audit to help the auditor form an opinion on the fund’s compliance with these requirements.”
To put this into perspective, there are 600,000 SMSF’s in Australia so only 2% of SMSFs will receive the ATO letter. When the ATO first made this announcement, penalties of $4,000+ were being threatened to SMSF Trustees for not properly diversifying their investments.
Like many issues relating to tax and superannuation laws, extreme cases overtake the facts; in this case, the above Alert was probably occasioned by some SMSFs embarking on the following out-of-the-ordinary strategies:
- Having one investment, usually a real estate property.
- Having all investments in high risk assets such as shares in start-up companies.
- Investing in related entities.
- Purchasing motor bikes or cars.
- Investing in assets used by the members of the SMSF.
The plain fact is that the clear majority of SMSF Trustees invest in income producing assets that have been purchased with the aim of deriving income and capital gains to fund the retirement of the SMSF’s members. Evidence of this fact is that only 2% of SMSFs are expected to receive the ATO’s letter. Regrettably the recent hysteria in the media about the ATO’s letter overlooked this fact.
We anticipate that either none or very few Nexia clients will receive the ATO letter because the SMSFs for which we prepare accounts, tax returns and/or audit invest in legitimate income and capital gains producing assets. Any improper investments are usually quickly reported to the Trustees to rectify. To not do so may cause the SMSF to become non-complying with the superannuation law resulting in the income AND the value of the SMSF’s assets being taxed at 45% in the year of the breach – this is a devastating outcome.
In May of this year, the ATO released the following statistics in respect of the year ended 30 June 2017:
- 10% of all SMSFs held all of their investments in one asset class.
- SMSFs with smaller asset holdings are more likely to have a high asset concentration.
- 41% of SMSFs with assets less than $50,000 held only one class of asset such as shares or cash. Less than 8% of SMSFs with assets over $500,000 had just one asset class.
- Nearly 50% of SMSFs held 50% or more of their assets in cash, term deposits or listed shares.
- Cash and term deposits were the sole asset of 9% of SMSFs.
- 6% of SMSFs invested 90% or more in listed shares.
- Only 0.2% of SMSFs solely held listed shares.
- SMSFs in accumulation phase were more likely to hold one asset class.
- SMSFs in pension phase were more likely to diversify their investments.
Investing in shares of a wide variety of listed companies arguably demonstrates a diverse range of investments due to the number of industries in which many such companies have strong businesses.
SMSFs should always be in a position to pay an unexpected death benefit or pay minimum pensions. Having a real estate asset as an SMSF’s sole asset may not meet such liquidity requirements.
Lastly, the Trustees of an SMSF should have a written investment strategy that should be regularly reviewed to ensure that the SMSF is investing in appropriate assets to enable the payment of pensions and unexpected death benefits.
Do not hesitate to contact your Nexia advisor with any questions regarding the management of an SMSF.
