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Many of the SMSF investing in real property.They do not want to invest in shares or securities. ATO rules require SMSF to be appropriately diversified.
How can an SMSF meet with this requirements?
As an auditor should we comment on this?
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Hi Team,
Is there any suggestion of percentage of investments from ATO?
For example not more than certain percentage in one investments?
If the SMSF invest 80% in property and 20% in shares, can they say diversification satisfied?
Hi Noble
This issue has been raised recently and a similar concern has also been where a SMSF has been set up & its only investment class is cryptocurrency & what should the auditor do. I was talking to a SMSF trustee yesterday that had set up a SMSF in 2020/21 & had contributed $200,000 into a SMSF & the only investment was cryptocurrency & current value now approximately $120,000.
Only holding 1 investment or one class of investment would only be a breach of SIS regulation 4.09 if the trustees have not given consideration to diversification.
That is in relation to diversification you can qualify the audit report on this if the trustees have not considered diversification as part of their investment strategy.
It is important to remind the trustees in your management letter of the requirement for them to consider diversification as part of their investment strategy.
The audit report states in relation to regulation 4.09 re the investment strategy that "the fund trustee has an investment strategy, that the trustee has given consideration to risk, return, liquidity, diversification, the insurance needs of fund members, and that the fund's investments are made in line with that investment strategy. No opinion is made on the investment strategy or its appropriateness to the fund members.
The ATO did write to trustees back in 2019 where they were of the view that the Fund's investments may not be diversified (based on information in the annual return). The ATO also advised:
"What does having regard to diversification mean and can I invest all my retirement savings in one asset or asset class?
While a trustee can choose to invest all their retirement savings in one asset or asset class, certain risks such as return, volatility and liquidity risks can be minimised if a trustee chooses to invest in a variety of assets. This is called a diversified portfolio which helps to spread investment risk.
Investing the predominant share of your retirement savings in one asset or asset class can lead to concentration risk. In this situation, your investment strategy should document that you considered the risks associated with a lack of diversification. It should include how you still think the investment will meet your fund’s investment objectives including your fund’s return objectives and cash flow requirements.
Asset concentration risk is heightened in highly leveraged funds, such as where the trustee has used a limited recourse borrowing arrangement to acquire the asset. This can expose members to a loss in the value of their retirement savings should the asset decline in value. It could also trigger a forced asset sale if loan covenants (for example, the loan to valuation ratio) are breached.
Super laws also require trustees to invest in accordance with the best financial interest of all members. You need to be aware of any legal risks that may result from investing in one asset class."
Thanks
SMSF AAA