SMSFs struggle to follow ATO diversification line

ATO commissioner Chris Jordan addresses the National Press Club. Picture: Twitter
ATO commissioner Chris Jordan addresses the National Press Club. Picture: Twitter

Not for the first time, the million-plus members of self-managed super funds in Australia are getting frustrated with the tax office. The trouble is not the payment of tax, but the odd role the ATO plays as regulator of DIY funds.

The ATO will be soon be issuing guidance on what constitutes an unacceptable investment strategy for a SMSF, but will not provide guidance on what constitutes an acceptable investment strategy. It is happy to tell you what not to do, but it refuses to even issue guidelines on what it wants you to do.

ATO assistant commissioner Dana Fleming said: “I’m in the process of developing investment strategy guidance, and it makes the point that an investment strategy that just lists on its own zero to 100 per cent as the investment range for every type of asset class is not an acceptable investment strategy — you may as well just not have one.”

But when asked about whether guidance would be provided about what should be in an investment strategy document, Fleming said: “We’ve had lots of people ask us to provide an investment strategy template, but I am not travelling this path because as soon as you give someone a template they think they can tick boxes and that is solving their problem.”

Interestingly, there appears to be no uniformity or industry standard when it comes to the investment strategy document and how investment guidelines for different asset classes are set.

Star & Associates chartered accountant Luke Star says: “Our observation of our clients who run SMSFs is that almost all of them use 0-100 for their projected investment band in their investment strategy. They have adopted this approach to allow for optimal flexibility in their investment decisions. This flexibility of choice is one of the main drivers for adopting the SMSF structure in the first place. This change in stance is going to create confusion and it is highly likely that trustees will incur significant costs in revisiting their strategy.”

Star also notes that some accountants are reluctant to get too involved with the investment strategy process as the relatively new laws that outlaw accountants recommending SMSFs are still creating confusion: “Under the licensing laws, the most appropriate person for SMSF trustees to seek advice from with regard to the appropriateness of the investment strategy would be a financial planner. The process may involve a full statement of advice to ensure compliance with the regulatory requirements.”

On the other hand, Lisa Sheldon, a tax specialist at Rothsay chartered accountants, says: “I tend to agree with the ATO that 0-100 per cent doesn’t mean anything with regard to strategy and feel it is being too cheeky on the rules. Our approach is to ensure the trustees do an annual review of their investment strategy by looking at the last set of annual SMSF financial accounts, thinking about anticipated changes to asset holdings over the next 12 months and setting bands around it for each asset class.”

One point not raised by the ATO but recently made clear by specialist superannuation lawyers is that investment strategy for SMSFs may include non-SMSF assets. This is a crucial point. For example, if you have investment property outside your SMSF, then that holding can be relevant to the level of property you have in a well diversified SMSF.

In a recent note for specialist superannuation lawyers, SUPERCentral says trustees are not restricted to the assets in their SMSF when giving regard to diversification under SIS regulation 4.09.

‘‘Given that the wording of the regulation allowed trustees to consider investments they had outside their SMSF when looking at the need for diversification, it was likely that a non-diversified strategy could be appropriate for some trustees,’’ the law firm says.

In other words, diversification in an SMSF does not stop with the SMSF assets

. But the ATO has raised a key question: is a vague strategy that allows the SMSF to do just about anything its trustees want actually a strategy at all?

Mark Wilkinson, superannuation partner at accounting and professional services firm BDO, agrees and says: “If you’ve got a document with every asset class from 0-100, well what is the strategy? It’s not indicated with the parameters so broad. The ability to invest in everything is not a strategy.”

In terms of how to create a more acceptable investment strategy, Shelden gives the example of an SMSF with 8 per cent in cash which is likely to increase to 12 per cent of the funds holding over the next 12 months with contributions.

“In this case, we would guide the SMSF trustee to think about a tolerance to cash of between 5 to 15 per cent and in 12 months’ time, repeat the process of looking backwards and planning forward and set a new investment strategy.”

One thing SMSF trustees may get caught up on is the feared restriction if they narrow the investment strategy too much. However, Wilkinson says that’s not an issue at all: “Theoretically, an SMSF trustee could change the investment strategy as many times as they wanted in a year if they felt it appropriate to update it. I don’t see the ATO imposing punitive action on investment strategy documents unless there is no investment strategy document at all.”

James Gerrard is the principal and director of financial planning firm