Recently the ATO sent out letters to some 17,700 SMSF Trustees reminding them to consider and review their investment diversification. Let’s take a look at why and what trustees should be doing about it.
SIS Regulations require fund trustees to formulate and regularly review an investment strategy for their SMSF. This investment strategy must consider several areas such as risk, return, insurance and asset diversification. Read about investment strategies in more detail in our blog: Your SMSF Investment Strategy
The ATO are concerned that trustees are not focusing an adequate amount of consideration to diversification. As a result they sent out letters to SMSF trustees that held only one or two assets. Typically this is a property and some cash. The ATO is not saying that this is necessarily not complying with the rules but they strongly urge trustees to review and document why they consider it appropriate to be heavily concentrated in a particular asset class. Read more about the ATO’s position on this here: https://www.ato.gov.au/Super/Sup/Does-your-SMSF-investment-strategy-meet-diversification-requirements-/
If an SMSF is not diversified it can put the fund assets at risk. For example if the fund only holds a property then it will be exposed heavily to real estate market risk and largely impacted by a drop in property prices. By owning a range of assets this risk may be reduced. It can also affect liquidity, for example if the property can not be rented.
If you would like to learn more about your investment strategy and your responsibilities as SMSF trustees get in touch with us here.
This information has been prepared without taking into account your objectives, financial situation or needs. Because of this, you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs.