Paul's Insights: 'Mum and dad' super funds targeted by Tax Office
Australians have taken to self-managed super funds (SMSFs) like ducks to water. Over 1.1 million of us are members of a SMSF, and with close to $750 billion in retirement savings, 'mum and dad' funds control nearly one third of the nation's $2.76 trillion superannuation assets.
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.
Paul Clitheroe is Chairman of InvestSMART, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.