SMSF Diversification Notices?

HI Everyone,

Has anyone received a letter from the ATO regarding their SMSF asset class diversification ratios?

Does your SMSF investment strategy meet diversification requirements?

I am fairly certain that I’m O.K. this year, however I am considering purchasing a second property which would mean most of the fund’s allocated to property. I believe this will be acceptable as my wife’s business can always use extra commercial premises, however I’m not certain of what may be required if/when this happens? Anyone had any experience (or thoughts) in regards to this?

 

But it is a SMSF investment - nothing to do with your business really. Would it be prudent for a trustee to invest in the property?

The trustee should get some legal advice before.

 

Thanks Terry,

Advice was sought before the initial purchase. Agree totally that discussion and advice be sought before making major investment decisions.

My wife’s business currently rents the premises from the existing property in SMSF. If the SMSF buys another property, we are looking at purchasing another property which is currently tenanted. However, if/when it becomes vacant, my wife’s business is expanding, and could also rent this new premises too, so the risk to the risk to the SMSF is low. Also it would be an outright purchase; no loan involved to the SMSF. However the majority of the fund would then be in property, which is the question; if anyone has received an enquiry from the ATO regarding asset allocation in one class, how did they respond?

 

If the SMSF was 99% invested in equities (diversified or not) & the backside fell out of the market aka GFC-style correction, would it be any different?

That is, a fund with one residential property tying up the bulk of the asset value or one Resi & one CIP if this is a permissible form of investment under the fund's strategy?

 

And the majority of the SMSF assets leased to one party too.

 

Good observation. However, both investments are commercial, existing and proposed are commercial offices, not residential investments. We take a very long term view in investment and won’t enter/exit a particular class due to short term fluctuations. Offices can be made available to either external clients or wife’s business; in either case, whether the investment class falls on rises in the short term, isn’t the concern... it’s i the short term, while the majority of the SMSF investments are in one class, what the ATO letter’s implications are. Allocation into cash and shares will rebalance in time... its the ATOs interest and any Trustees respective responses are of interest:

 

Hi Terry,

Not if the second property is already leased at time of purchase; but this could definitely happen in the future. Good point. However, I’m interested to hear if anyone has received a letter, and what happened as a result of the notification?

 

It was issued in August to around 18000 funds. Pretty threatening letter especially when we found out that 1/3 of all smsfs have 90% invested in one asset class yet this was only issued to 18000 funds when in fact 200000 funds are impacted.

What it means is that if you received the notice - which many of our clients did - you must review your investment strategy and update it. It does not mean you need to go buy shares, it means you have to document your strategy and generally understand the concept of diversification. For most clients of mine, they don't like or want to invest in shares and use rental income and contributions to pay down a loan. Further, a exit strategy will be documented.

There has been no follow up from the ATO yet but there will be. We spent around a month updating a template investment strategy that was provided to effected clients.

Here is a blog we wrote at the time ATO letter on diversification of assets - Redwood Advisory SMSF

However since then we have corresponded with all effected clients to ensure rectification is performed.

Hope that helps

Merry xmas to all Cheers Ivan

 

Thanks Ivan,

That was a useful link... I don’t think anyone really wants a letter from the ATO and may feel a bit nervous receiving one! Our fund is relatively new and the investment strategy still matches and is suitable at the moment. If’s just if a second commercial property is purchased, then I suspect our fund would then fit the non-diversified criteria. Simply waiting and building more into the other asset classes would be the simple way to go, but there are a few properties at the minute that would meet our criteria so it’s tempting to purchase now and then the fund will rebalance again... it’s just what others have had to do once they received a letter was of interest to me.

Thanks to all for your replies so far, hope everyone is having a great break over Christmas/New Year.