ATO warns of SMSF concentration risk

The Australian Tax Office is set to contact tense o thousands of SMSFs warning of the risks of being too concentrated.

The ATO announced it will be contacting around 17,700 SMSF trustees and auditors at the end of the month who they suspect may be holding 90% or more of their  funds in one asset or a single asset class.

Many of the SMSFs in the ATO's sights have limited recourse borrowing arrangements in place, with most of the almost 18,000 SMSFs holding most of their assets in property.

"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," the ATO said.

"Lack of diversification or concentration risk, can expose the SMSF and its members to unnecessary risk if a significant investment fails."

The ATO will ask the SMSF trustees to review their investment strategy and "clearly document" their reasons for 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," it said.

Diversification is a key aspect of the things SMSF trustees have to consider as part of their investment strategy, according to the Superannuation Industry (Supervision) Regulations 1994.

In addition to diversity, SMSF trustees are required to "formulate, review regularly and give effect" to an investment strategy, including consideration of risk, return, liquidity, the ability to discharge liabilities, and if the fund should hold insurance for members.

Read more: SMSFATOAustralian Tax OfficeSuperannuation Industry Regulations
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