I. Is this the start?

There is no doubt that the ATO is getting aggressive with SMSFs.  Since taking over the regulation of SMSFs in 1999 the ATO was focused on education and the roll-out of numerous rulings, guidelines, videos and legal information helping SMSF Trustees and their advisers navigate the SMSF legal and regulatory waters.  But in the past few years, with changes at the managerial level in the ATO a greater focus has been leveled at compliance by SMSF Trustees.

II. New Tack: Direct Communication bypassing Accountants

You may or may not be aware, but all would be SMSF trustees seeking to set up their SMSF with monies from industry or retail super funds have been phoned by representatives of the ATO questioning their motives for setting up an SMSF.  Not only motives but knowledge of sole purpose test and other areas of the SIS Act 1993.

As professionals, we are used to dealing with the ATO but for a non-professional getting a call from the ATO at any time is scary, particularly when your intentions and motives are questioned.  In fact, there have been cases where prospective SMSF Trustees were not allowed to set up an SMSF by the ATO, notwithstanding that there is nothing in the SIS Act 93 that provides the Commissioner of Taxation with that ability.  But who would challenge the ATO?

III. 17,000 Letters sent to SMSF Trustees and their Auditors in an Investment Strategy Blitz

The latest forceful foray by the Commissioner of Taxation into compliance focuses on investment strategies in an SMSF.  The Deputy Commissioner of Taxation James O’Halloran has written to more than 17,000 SMSF Trustees and more importantly their auditors bypassing their administrators and accountants.

In respect of auditors the Deputy Commissioner stated:

“One or more of your clients should have received an investment strategy letter. In which case you should check that they have an investment strategy that complies with regulation 4.09.

In particular, you should expect to see documented evidence from the SMSF trustee which demonstrates that the following was considered:

  • diversification of the fund’s investments and the risks associated with inadequate diversification; and
  • that other relevant factors were considered such as the risk involved in making, holding and realising and the likely return from the investments having regard to the fund’s objectives and expected cash flow requirements;
  • the liquidity of the SMSF’s investments, having regard to its expected cash flow requirements and ability to discharge its existing and prospective liabilities; and
  • whether the trustees considered holding insurance for one or more of the members.

It is up to you to determine whether any contravention of regulation 4.09 on the basis of non-compliance with the above listed factors would amount to a material contravention resulting in modification of the audit report.”

As can be seen, this is not just a diversification issue but a complete review of all factors covering an investment strategy as per SIS Regulation 4.09.  Following the case of Cam & Bear Pty Ltd v McGoldrick [2018] NSWCA 110 where an action and damages against an auditor in terms of the Fund’s investments in addition to the very broad recovery action against an auditor under section 55(3) of the SIS Act 1993, we can expect auditors to be very, very thorough regarding the Fund’s investment strategy.

On the other side of the equation, the letters to SMSF Trustees holding predominantly property, with or without an LRBA stated the following:

“Dear Trustee

Our records indicate that your self-managed super fund (SMSF) investment strategy may hold 90% or more of its funds in one asset, or a single asset class.

This means that your fund may be at risk of not meeting the diversification requirement as outlined in the operating standard of the Superannuation Industry Regulations 1994.

As a Trustee, you are ultimately responsible for ensuring your investment strategy meets the requirements under the law.  You could also be liable for an administrative penalty of $4,200 if your investment strategy fails to meet these requirements.”

I am sure many accountants, administrators, and planners have been caught on the hop by this action and madly scrambling on what to do and how to assuage clients.

IV. So, this is What to Do

First off, this is a targeted action against property holding SMSFs but given the warning on the entire investment strategy to auditors, the investment strategies of all SMSFs need a thorough review.  The section I noted above – section 55(3) not only applies to auditors but to accountants, administrators, and planners.  So, we need a strategy to get through this as an industry.

This is what to do.

Step One:  Tell the client that the Commissioner of Taxation is looking at Fund investment strategies via the auditor of the Fund and that you will be liaising with them to ensure the best course of action so no fine is levied.

Step Two: I have an important webinar on Thursday 12 September 2019 discussing the letters, the law, and the next steps.  To register for this no-cost webinar please go to: https://zoom.us/webinar/register/WN_eMByA7sGS1eET3e1cNYVLg

Step Three:  Put in place a response firstly for the client and then the auditor.  At the webinar, I will provide relevant letters for each and suggestions on what to do with any current investment strategy.

We need to get on top of this and address it quickly as it is only the tip of the iceberg as we move into a new stage of mass compliance.  Expect many, many more letters like this.