Received a letter from the ATO about your funds investment strategy? What next?

Trustees that have received an ATO letter and have an SMSF with a large proportion of their investments in a single asset or asset class should in the first instance review their investment strategy documents. Trustees must be able to provide their SMSF auditor with evidence of how they consider their investment strategy meets the SIS requirements. However, immediate action by the trustees would not be necessary.

What is the auditor likely to do? Your auditor can not only ask you to address this issue and state how you plan to deal with it but, if the fund fails to adequately consider the legislative requirements when drafting an investment strategy, may also be required to report this to the ATO.

Since a recent court case where an auditor was sued for not drawing attention to the risks associated with a particular investment, there has been a heightened awareness of SMSF investment strategies. As far as diversification is concerned, although a fund must not necessarily have a diversified portfolio, but the trustees must seriously consider this, especially the risks of not being diversified.

Superannuation funds have a specific requirement set down in law of being managed for the sole purpose of providing retirement benefits to their member’s. SMSF trustees must comply with this for the tax concessions.

As far as a fund's investment strategy is concerned, the ATO is coming out on the front foot by pointing out it is an important document that SMSF trustees may not have been paying as much attention to as they should be.

The investment strategy isn't just about diversification, but also about addressing risks, the investment return as well as the liquidity and the cash flow requirements of a fund.

Whereas in the past auditors may have made certain presumptions about these issues, what the ATO is now saying is that it wants auditors to be checking the investment strategy in greater detail to make sure that if these matters do not appear to be considered, then more work needs to be done.

Trustees simply need to have this document ready for review by the fund's auditor as part of the fund's next audit.

This does not necessarily mean they should rush to completely replace their investment strategy document; rather they could simply minute some additional context to supplement their existing documentation.

What the ATO is highlighting is that where a fund is taking action that is perhaps slightly unusual (for example, concentrating its investments in as single asset or asset class), it is prudent to consider whether the template alone is sufficient to ensure it reflects the serious consideration given by the trustees in making the decision.

The ATO's current action is perhaps a valuable reminder of one circumstance where expanding the normal documentation would be appropriate.