Last week the ATO wrote to 17,700 self managed super funds (SMSFs) and threatened fines of up to $4,200. That’s one in every 33 SMSFs! The threat was issued to trustees where their SMSF had more than 90% of its assets in one asset class.
But that in itself is not a breach.
As all SMSF trustees will know:-
Their fund must have an investment strategy, and
An investment strategy must consider investments, providing retirement benefits, risk and diversification, and
That SMSFs are audited (and the ATO have already audited the auditors).
You might well therefore ask why the threat. And more to the point, why threaten trustees and do so with significant fines.
Whilst this approach seems unnecessary, some funds may need to better evidence their decisions.
There is nothing wrong with having the bulk of your SMSF assets in just one class. You just need to make sure your investment strategy evidences that and the reasons why.
If there is an issue it remains in respect of property owned by a fund in, or largely in, pension mode. There comes a point for some SMSFs paying pensions that the rate of return (i.e. net rent) is below minimum pension levels. Pension payments are based off market values, so in time cash reserves can be drained (noting that the minimum pension rate is 6% of asset values from age 75, 7% from age 80 with escalating increases thereafter). The problem escalates if the property becomes untenanted.
In closing, I’d like to make three points:-
Investment strategies are not set and forget documents. They were introduced to force trustees to evaluate and monitor all investments.
Measuring SMSFs investment mix/percentages based off numbers as they are 30th June is prone to error. Accumulation funds are often flushed with cash at 30th June with last minute contributions (although not so true today with such low concessional contribution caps). Conversely, pension funds are typically low on cash at 30th June as many SMSFs only pay pensions in the back end of June.
This is again a reminder of the many reasons as to why the trustee of a super fund should be a company and not individuals. If the ATO is successful in fining the corporate trustee of a SMSF over this matter then the fine will be $4,200. If individuals are trustees, the fine will be $4,200 per trustee. Four trustees means the ATO will pocket $16,800! And remember that such fines must be paid personally; the fund can’t pay it on the trustees behalf.
We will be contacting our SMSF trustees who may receive such letters. If you do though have any questions, please don’t hesitate to call us.
At MRS, we will spend today planning for your success.