Since the ATO issued letters to 17,700 trustees regarding issues with the diversification requirements, it has been interesting to observe the varying behaviours within the SMSF sector regarding this issue. For some, it has clearly been seen as an opportunity to go back and review the fund’s within their practice regarding the fund’s investment strategy documentation, for others, the view is that the ATO has made a mountain out of a molehill.
We have recently seen the ATO SMSF segment assistant commissioner, Dana Fleming, make comment that the need to address this updated requirement is not to recreate ‘war and peace’ (e.g. a new Statement of Advice), however sufficient evidence does require more than lip service to the requirements within SIS Regulation 4.09. In particular saying that ‘the trustees have considered the items in regulation 4.09B [of the SIS Act]’ is not sufficient.
Whilst the target of these letters was directed towards SMSFs within single asset concentration in property with LRBAs, it was also interesting to see the ATO make the comment that nearly one-third (180,000) of funds existed with 90% or more of their retirement savings in a single asset or asset class. Against the backdrop of two important case law decisions (Cam & Bear Pty Ltd v. McGoldrick and Ryan Wealth Holdings Pty Ltd v. Baumgartner) last year against SMSF auditors, I suspect that the SMSF audit fraternity will be far more diligent in being satisfied that the fund has adequately considered the requirements of the operating standard, SISR 4.09 – not just for the 17,700 that have received letters, but more generally for the 180,000 funds that reflect similar positions.
Why is this important?
For trustees, there is a need to understand that adhering to the requirements of the investment strategy process is not just about compliance, where failure can lead to administrative penalties of $4,200 applying (20 penalty units), but without having a properly formulated and clearly communicated investment strategy, the trustee is at risk of action being taken by a member (or beneficiary) under section 55 of the SIS Act for recovery loss or damage for contravention of a covenant within section 52B, applicable for SMSFs.
How to satisfy this requirement?
First and foremost, the fund’s investment strategy needs to be documented that clearly demonstrates that all elements of regulation 4.09B have been taken into account, including the personal circumstances of the fund.
What is also important is that where heavy asset concentration exists, the ATO has indicated that a simple trustee minute or some other kind of addendum to the investment strategy that acknowledges the decision to invest within a single asset, what type of asset it is and the rationale for long-term growth and it’s suitability to meet the member’s retirement objectives.
Tell us what you think? Is the ATO’s approach overblown? or do you think it’s a good thing where the industry can step up to improve the role of a fund’s investment strategy in meeting retirement objectives?
Time to step up?
The decision by the ATO to issue such a letter reflects a level of concern by the Regulator to trustee awareness of the role that an investment strategy plays in building for retirement. This initial letter (i.e. there may be more in the future) reflects an outcome that the ATO would be pleased about.
It has certainly heightened awareness of the topic and in many instances we are seeing many practices working with SMSF clients revisit the quality of documentation they have in place with their investment strategy. Some firms are taking the opportunity to address this documentation for all SMSF clients, for others, using this to address certain clients that have heavy asset concentration in meeting SISR 4.09. See our previous article, insights from our investment strategy webinar.
Smarter SMSF investment strategy
In addition to the investment strategy template that can be created on the Smarter SMSF platform, you now have the ability to produce additional trustee minutes in response to the ATO letter or alternatively where the fund has heavy asset concentration (currently property only, but expanding this to include various other asset classes).
A reminder that we currently have the investment strategy document on special for $99 (incl. GST) until 31 October 2019.
We will shortly be releasing this document to create within Simple Fund 360, in addition to using existing integrations on the Smarter SMSF website. We also expect to be releasing in the near future a bulk investment strategy process, should you wish to generate multiple documents as part of a single order – using the fund information within your BGL or Class software.