Paul's Insights: 'Mum and dad' super funds targeted by Tax Office
One of the main reasons people opt for a do-it-yourself super fund is the ability to take control of their own nest egg. But – and it’s a big but – strict rules apply to the way SMSFs can invest.
The Australian Tax Office (ATO) regulates the SMSF sector. And it’s a role the ATO takes very seriously.
In late 2019, the ATO contacted over 17,000 SMSFs whose records showed the fund had 90% or more of its investments in just one asset or a single asset class.
The ATO’s logic is that a lack of diversification – or ‘concentration risk’, can leave a SMSF and its members exposed to unnecessary risk if an investment fails.
The ATO is certainly onto something here. Putting all your retirement savings into a single asset can be a high risk strategy particularly if you don’t hold other, more diverse assets outside of super.
The ATO’s 90% single asset benchmark is particularly relevant to SMSFs that have invested in one or two rental properties using non-recourse loans. However, risks can also apply to SMSFs that are heavily invested in cash. The fund simply may not earn sufficient returns to generate a decent retirement income for its members.
What the ATO is looking for is that fund members have made an informed decision on their SMSF’s investment strategy.
That’s why your SMSF needs a formal investment strategy set out in writing that explains why you believe your fund is diversified to your requirements, and that you’re aware of the risks this strategy can bring. Secondly, the SMSF’s assets should be invested in line with that strategy.
Your written investment strategy shouldn’t be a tick-a-box document designed solely to keep the ATO at bay. It is, in fact, an important tool that should be reviewed periodically so that you’re confident your SMSF is helping you meet your retirement goals while also satisfying the ATO’s compliance requirements.
Diversification is so cheap and simple to achieve these days, it makes a lot of sense to me that we spread our super risk by investing across many different asset classes.
InvestSMART offers a number of diversified portfolios in our Capped Fee range, click here to find out more.
Paul Clitheroe is Chairman of InvestSMART, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.
Frequently Asked Questions about this Article…
A self-managed super fund (SMSF) is a type of superannuation fund in Australia that allows individuals to take control of their own retirement savings. People often choose SMSFs for the flexibility and control they offer over investment decisions, allowing them to tailor their investment strategy to their personal financial goals.
Diversification is crucial for SMSFs because it helps spread investment risk across different asset classes. This reduces the potential impact of a single investment failing, which can be particularly risky if a fund is heavily concentrated in one asset or asset class. The ATO emphasizes diversification to protect SMSF members from unnecessary risks.
The Australian Tax Office (ATO) regulates the SMSF sector and ensures compliance with superannuation laws. The ATO monitors SMSFs to ensure they have a diversified investment strategy and are not overly concentrated in a single asset, which could expose members to significant financial risk.
The ATO's 90% single asset benchmark is a guideline indicating that if an SMSF has 90% or more of its investments in one asset or asset class, it may be at risk of concentration. This benchmark is used to encourage SMSFs to diversify their investments to mitigate risk.
To comply with ATO regulations, SMSFs should have a formal, written investment strategy that outlines their diversification approach and acknowledges the associated risks. This strategy should be regularly reviewed to ensure it aligns with the fund's retirement goals and ATO compliance requirements.
Investing heavily in cash within an SMSF can pose risks because cash investments may not generate sufficient returns to provide a decent retirement income. Diversifying across various asset classes can help achieve better long-term growth and income potential.
An SMSF's investment strategy should be reviewed periodically to ensure it continues to meet the fund's retirement goals and remains compliant with ATO requirements. Regular reviews help adapt the strategy to changing financial circumstances and market conditions.
Achieving diversification in an SMSF can be simple and cost-effective. Investors can spread their risk by investing across multiple asset classes, such as shares, bonds, property, and cash. Services like InvestSMART offer diversified portfolios that can help SMSF members achieve their diversification goals.
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