Are you effectively communicating the importance of diversification to your SMSF clients? Delegates have been warned how to avoid triggering the ATOs radar.
Aaron Dunn, who is the chief executive of Smarter SMSF, has provided an update on SMSF regulation, explaining changes to legislation and what the ATO is cracking down on at the moment.
Discussing recent action by the ATO, Dunn said diversification within SMSF investment strategies is increasingly of interest to the tax office.
Earlier this year, the ATO wrote to 17,700 SMSF trustees warning them their SMSF did not meet diversification requirements. About 99% of the SMSFs concerned were invested entirely in one asset class - property.
The action came on the back of a CFR report earlier this year in which the CFR said there are pockets of concern in the SMSF space but no systemic risk.
"[The letter] didn't include the fact that trustees can invest in whatever they choose to, that being one of the main reasons someone would have an SMSF... Still, it did outline the penalty for not meeting requirements," Dunn said.
That penalty is $4200, applicable to every individual trustee within the SMSF, to be paid out of their own pocket and not from the fund.
The ATO also wrote to auditors this year, telling them they must be satisfied that diversification has been adequately considered in the SMSF's investment strategy.
Dunn highlighted two cases from 2018 that demonstrate the risk auditors run by not sufficiently auditing SMSF documentation.
The Cam and Bear - otherwise known as 'the cheese case' - and Baumgartner cases saw the individual SMSF auditors "left to carry the can" when investments failed.
"As the auditor, they had the professional obligation to ensure the investment strategy was satisfactory," Dunn explained.
If ever in doubt, Dunn advised planners go back to the trust deed - keeping in mind the ATO has recently said 0-100 asset ranges are not acceptable.
The ATO is expected to release further guidance around what constitutes an appropriate or acceptable investment strategy.
Providing some context, an AFCA ombudsman who was in the crowd stood up and described some of the cases the body is currently dealing with, mentioning that some have recently been decided.
"We take everything into account when we look into things - ASIC, ATO, APRA guidance - and some of the things we're seeing at the moment include cases where there's no strategy, we see 0-100, we see funds that will cause huge problems if the property devalues and there's no capacity for contributions to cover shortfall - the list goes on," she said.
Dunn said the recent heat placed on the SMSF space has led to a number of developments, including trustees updating their investment strategy documentation; additional trustee minutes where heavy asset concentration exists within the fund; and auditors increasing their level of activity around investment strategies to better manage their own risk.