(08) 9594 1963
Unit 7, 12 Belgravia Terrace, Rockingham, WA 6168

Diversity in Self Managed Superannuation Funds (SMSFs)

By Heaney Business Group

Making a deliberate decision to have little diversity in Self Managed Superannuation Funds (SMSFs) is a choice many trustees make. Choosing to do this is acceptable however you must be able to prove this was an active decision and be able to justify your reasoning. The Australian Taxation Office (ATO) has stated: “a lack of diversification or concentration risk can expose the SMSF and its members to unnecessary risk if a significant investment fails.” The ATO has recently contacted over 17,500 trustees with concerns of a lack of asset diversity in Self Managed Superannuation Funds (SMSFs).  Trustees contacted hold 90% or more of the fund’s assets in a single asset or single asset class.

The Superannuation Industry (Supervision) Regulations state in section 4.09 that trustees must “formulate, review regularly and give effect to an investment strategy that has regard to the whole of the circumstances of the entity.”

In regards to the investment they must:

  • Evaluate the diversity of the strategy and the subjection of a lack of diversity
  • Evaluate  liquidity and the funds’ cash flow requirements
  • Understand the risks involved, its objectives and the cash flow of the fund
  • Evaluate the funds’ ability to release its liabilities and
  • Evaluate and have suitable insurance cover for members and assets

Area of concern

One area of concern being assessed by the ATO is property as low property prices have caused the asset value of many funds to decrease.

Recently, debt incurred by SMSFs has significantly risen. The number of SMSFs using Limited Recourse Borrowing Arrangements (LRBAs) to buy property has risen from 13,929 (or 2.9% of all SMSFs) in 2013 to 42,102 (or 8.9% of all SMSFs) in 2017. In regard to SMSFs that have bought a property through an LRBAs. These LRBAs amounts to an average of 68% of the fund’s total assets.

LRBAs are prevalent in SMSFs with a net fund size ranging from $200,000 and $500,000. The net fund size is inclusive of total assets, but excluding the value of the amount borrowed. The mean borrowing under an LRBA in 2017 was $380,000 and the average value of assets was $768,600

Need professional taxation advice? – Contact HBG Tax and Accounting

The team at HBG Tax and Accounting are your local Rockingham accountants with extensive experience in all areas of accounting and tax. Call the team on 08 9594 1963 to discuss your tax needs or call in and speak to the team at Unit 7, 12 Belgravia Terrace, Rockingham.

The material and content provided in this article is of informative nature only. It is not intended to be advice and you should not act specifically on the basis of this information alone. If expert assistance is required, professional advice should be obtained.

Contact Heaney Business Group today to talk about your SMSF