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Portfolio diversity not a legal requirement

investment diversity SMSFs

The ATO has made SMSFs aware of the lack of diversity in investment portfolios, but this is not a legal obligation that must be met.

Numerous SMSFs have misunderstood what assets they can hold under their investment strategy after the ATO contacted thousands of funds questioning the lack of diversity in their asset allocations, a technical expert has said.

SuperConcepts SMSF technical support executive manager Nicholas Ali said the ATO focused attention on diversity within SMSF portfolios in 2019 when it contacted around 17,000 funds that had 90 per cent or more invested in a single asset class, usually property via a limited recourse borrowing arrangement.

“The ATO has shown a lot of interest with regards to SMSFs and their investment strategy, in particular SMSFs with an investment strategy that has a ‘lack of diversification’ or funds that are invested outside their investment strategy,” Ali said during a recent online presentation.

“[In 2020 the ATO] started to bring out their guidelines, they asked: ‘Is the fund’s investment strategy tailored to the fund member’s individual circumstance?’, but when they released the guideline, the ATO didn’t necessarily say a fund can not be diversified.”

Despite the increased interest from the regulator, he said SMSFs have no legal obligations to diversify asset classes.

“There is nothing in the legislation that states trustees must use asset allocation ranges. The key thing is to put your mind or you client’s mind into the investment strategy, look at the specific assets and say: ‘Why has this fund decided to invest in this specific asset given the whole purpose of the fund is to build retirement savings?’” he said.

“How is that concentration into one asset or one asset class going to satisfy the overarching requirement for superannuation to be a retirement savings vehicle for the members?

“If they can justify that and say: ‘We’ve gone into this particular property because it’s a commercial property and we think it’s going to be able to be subdivided in the future and it’s going to provide a large amount of capital growth for the members,’ then that’s fine.

“We need to be mindful of the fact that the investment strategy is not a set-and-forget document. It is something that needs to be addressed and looked at and we need to make sure it is in line with the fund’s asset allocation.”

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