Industry concerns about the degree to which trustees are being targeted in the current ATO review of highly concentrated funds’ investment strategy are somewhat overblown, but SMSF professionals would do well to have a keener focus on their clients’ investment strategy, according to an SMSF audit firm.
ASF Audits executive general manager of technical services Shelley Banton told SMSF Adviser that, while much of the industry had been up in arms about the ATO’s decision to warn more than 17,000 funds that they were at risk of breaching diversification rules in the SIS Act, this represented a very small proportion of the SMSF sector overall.
“The ATO states that approximately 17,700 letters were sent out to SMSF trustees. Based on the ATO’s latest figures of 598,249 funds as at March 2019, this equates to 2.95 per cent of all SMSFs,” Ms Banton said.
“As a result, it’s clear that the majority of SMSFs are in good shape in relation to the diversification requirement of regulation 4.09 [in the SIS Act].”
However, Ms Banton added that it was good practice for trustees and their advisers to regularly update their investment strategy, and that the ATO’s review had highlighted that the approach with regard to the strategy documents should be about more than tick-box compliance.
“Investment strategies are not just tick and flick documents but should be put in place with regard to the whole of the circumstances of the fund as outlined in r4.09,” she said.
“A regular review of the investment strategy is necessary, especially when a trustee’s personal circumstances change or when the economy weakens.”
Ms Banton said for those who had received a warning letter from the ATO — including a number of ASF Audits clients — and were concerned about their investment strategy, they could look at either redoing the strategy or providing a detailed addendum to the original strategy by their next audit.
“Best practice would be for the trustee to review and amend their original strategy, but we would accept an addendum or a minute if it is formalised, dated and signed by trustees, and gives more detailed information on the strategy,” she said.
“The essence of this particular ATO initiative is to encourage SMSFs with heavy asset concentration to include more detailed documentation around the reasons for investing in a single asset class, and we are trying to educate clients to provide sufficient evidence.”
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