Almost 100% of non-diversified SMSFs are invested in property

The Australian Taxation Office (ATO) has clarified that 99% of self-managed superannuation funds (SMSFs) contacted about their lack of diversification only held property.

Last month the ATO contacted about 17,7000 SMSFs in August and their auditors as their 2018 annual return indicated that the funds might be holding 90% of more of their retirement savings in one asset or a single asset class.

“The SMSFs contacted also used a limited recourse borrowing arrangement (LRBA) to acquire the single asset or asset class. In 99% of the SMSFs contacted, the asset in question was property,” the ATO said in an announcement.

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“While nearly a third (180,000) of the total population of SMSFs have invested 90% or more of their retirement savings in a single asset or asset class, those SMSFs contacted were selected based on a report to government in February by the Council of Financial Regulators and the ATO.”

It said the report highlighted concerns that less diversified SMSFs with LRBAs were exposed to asset concentration risk “which in the event of a fall in the asset’s price could lead to a significant loss in the value of the fund”.

The ATO noted that while a trustee could choose to invest 90% or more of their retirement savings in a single asset or asset class, concentration risk combined with leveraged borrowings, could expose the SMSF and its members to unnecessary risk if a significant investment fails.

“We were concerned that these SMSF trustees may not have given due consideration to diversifying their fund’s investments and the risks associated with a lack of diversification when formulating and reviewing their investment strategy,” the ATO said.

“We asked trustees to review their investment strategy and clearly document the reasons behind the investment decisions.

“We also asked trustees to have their documentation ready for their SMSF’s approved auditor for their next audit to help the auditor form an opinion on the fund’s compliance with these requirements.”




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