SMSF investments

ATO Looking into SMSF Investments

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The Australian Taxation Office (ATO) is flexing its regulatory muscles by reminding SMSF trustees and auditors to consider diversification and liquidity risks in their SMSF investments.

17,700 SMSFs received ATO’s letter

The office wrote to 17,700– or 3 per cent of the nation‘s total 600,000 plus Self Managed Super Fund trustees. On its letter, the ATO cautions these Self Managed Super Fund trustees for having more than 90 per cent of their retirement savings in a single asset class, such as property.

“Our records indicated that your SMSF investment strategy may hold 90 per cent or more of its funds in an asset, or single asset class.”

“This means your fund may be at risk of not meeting the diversification requirement,” the ATO letter says.

It also reminded trustees that they may be liable for an administrative penalty of $4200 if their SMSF investments do not meet the “risk, return, liquidity and adequate diversification” requirements as stated in the Superannuation Industry (Supervision) Act.

Is ATO overstepping its boundaries?

It is worth mentioning that the ATO does not have the authority to force SMSFs to sell assets. In this case, the ATO is making sure trustees understand SMSF investment risks.

For trustees who can demonstrate an investment strategy that takes into account liquidity risks, no further action is expected. For SMSF investments that do not satisfy the superannuation law, they may be liable to penalties imposed by the Office.

ATO’s concern apparently stems from the report by the Council of Financial Regulators early this year that focuses on SMSFs with Limited Recourse Borrowing Arrangements (LRBA).

According to the report, there is no considerable risk to the SMSF and the property market sectors but the “prevalence of property as the main asset purchased under an LRBA, most commonly by low-balance SMSFs (under $500,000) who have little investment diversification and high loan to value ratios (LVRs)” is concerning.

The report said that these SMSF funds will be highly susceptible to changes in the property market.

“Less-diversified SMSFs with LRBAs are thus exposed to asset concentration risk, which in the event of a fall in the asset’s price, could lead to a significant loss in value of the SMSF,” the report said.

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So, the risk is heightened in SMSFs with LRBAs and loans guaranteed by assets outside of the super, like the family home.

In a crash, these trustees will be hit with losses both in their personal assets and their super.

It’s time to formulate solid SMSF investments strategies

The bottom line is, although it is common for SMSF with lower member balances to lack diversification in investments because there is very little money to invest, trustees need to be aware of their diversification obligations and must understand the risks involved.

Trustees must formulate an investment strategy that satisfies the superannuation law and appreciate asset concentration and liquidity risks when using SMSF investments in big assets like real property.

Diversification is the key. A portfolio with investments across different asset classes and markets poses less risk. In the event one class performs badly, trustees can still expect to earn and grow their SMSF investments and wealth with markets that are performing well.




The complexities involved in managing your own fund can be daunting. You need to make the correct financial decisions that align perfectly with your goals. Experienced SMSF accountants can help uncomplicate everything for you. Contact a Chan & Naylor accounting specialist hereWe’d be glad to help!

Also, have a look at our other accounting and advisory services designed to help you achieve greater financial success.

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