The tax office has clarified its investment strategy requirements for trustees after its letter-drop crackdown last year spurred investor panic.

In August last year, the ATO told more than 17,000 self-managed super fund trustees they faced stiff penalties – including fines of up to $12,000 – if they misused their SMSF.

You're free to hold your choice of assets in your SMSF – provided it's permitted by super laws and your fund's trust deed, the ATO said in its updated explainer last week.

Super assets must also pass the sole-purpose test, which stipulates they must be solely dedicated to building a retirement nest-egg.

You're not prevented from investing your entire SMSF portfolio in a sole asset – a business property is a popular choice – or a single sector. But your documentation must make it clear that you understand the risks associated with this lack of diversification.

Get it in writing

Your documentation must also explain how your fund's assets meet your investment return and income needs.

The ATO explainer suggests trustees consider specifying "appropriate allocations or percentage or dollar ranges for each class of investment you have chosen".

But simply picking a percentage number between 0 and 100 per cent for a broad range of assets – such as stating you'll invest 60 per cent in stocks and 40 per cent in bonds – isn't good enough.

You must break it down into specifics such as:

  • what types of direct stocks you hold
  • any credit products including corporate and sovereign bonds or fixed income funds
  • exchange-traded funds
  • managed funds and other vehicles your portfolio holds or intends to own.

"Your strategy must articulate how you plan to invest your super in order to meet your retirement goals," says the ATO explainer.

Nor is your SMSF investment strategy a set-and-forget document. It should be reviewed at least annually, and if any significant events occur such as:

  • - A market correction
  • - The removal or addition of an SMSF member
  • - You begin to draw a regular income from your SMSF

These reviews and any decisions stemming from them should all be documented. They should in turn be passed on to your auditor, who is usually an accountant you've appointed to the task – a legal requirement of the ATO.

"Why you're making the decisions you are has got to be documented, you need to explain in writing why it's appropriately diversified for you," says Melanie Dunn, senior actuary at Accurium.

"The auditors aren't there to check your investment strategy, but to check that you've appropriately thought about it."

Each of these measures should be recorded in a set of minutes that is updated whenever you make, or consider making, changes to your SMSF's investment mix or overall strategy.

"This investment strategy requirement is a way of prompting you to really consider what you're trying to achieve, and the strategies and asset allocation that you need to follow to achieve them," says Liam Shorte, a financial adviser and director at Verante Financial Planning.

Penalties the ATO can impose for failing to comply may also include ordering you as the trustee to undertake online education courses. This is usually the ATO's starting point when it first becomes aware of a breach. Failing to comply can result in a $2,200 fine.

But the tax office rarely invokes such measures to penalise individual trustees of SMSFs.
The 17,700 tax office letters warning against investment strategy breaches amounted to just 3 per cent of the total pool of 600,000 SMSFs.

Investment policy statement

You could think of an SMSF investment strategy as part of your investment policy statement, something strongly recommended by Morningstar US's personal finance director Christine Benz.

"In the investment policy statement, you're getting into 'what's my asset allocation that I'd like to maintain? What are the investment criteria that I'm looking for when I pick investments? How do I decide when it's time to sell?'" she says.

"All of those considerations are getting spelled out in the investment policy statement."
Benz also suggests a specific retirement policy statement may be useful, particularly in the common situation where two spouses have very different levels of involvement in investing.

"You might want to lay out a quick and dirty retirement policy statement, maybe something a little easier to understand, more condensed, easier to skim that gets into the broad outlines of your retirement de-cumulation plan," she says.

Dodging lodgement

Trustees who fail to lodge their SMSF annual returns – perhaps your most fundamental obligation – is another key area of focus this year.

Non-lodgement is a strong indicator that retirement savings could be at risk, says Dana Fleming, the assistant commissioner of the SMSF segment for the Australian Tax Office
It also often points to illegal early release, another of the tax office's focus areas this year.

Superannuation contributions are preserved until the member meets a condition of release, usually when they turn 65 and retire from full-time work. In some cases, individuals roll the balance of their APRA regulated super fund into an SMSF in order to illegally access this money.

Sometimes the owners of the fund make this decision themselves, and in other instances they're encouraged by an unscrupulous adviser or promoter of illegal "property spruiking" schemes.

"In the 2018 financial year, we disqualified 257 trustees from 169 SMSFs. And this year so far, we’ve disqualified 75 trustees representing 53 funds," says Fleming.

Some 12,200 new SMSFs were registered between July and December 2019. Of these, the tax office selected around 1200 for special scrutiny, which resulted in 123 funds being branded non-compliant and the cancellation of 329.

"This means we took action on over a third of the cases picked up by our risk models and we protected $45 million dollars of retirement savings," Fleming says.

SMSF breach

Source: Australian Tax Office

And the tax office has identified 64,000 "lapsed lodgers" – those who have lodged their SMSF annual returns in the past but haven't done so for a number of years – in the first half of fiscal 2019.

They have an average of 3½ years of outstanding SARs, and collectively hold around $27 billion in fund assets that are potentially at risk.

But Fleming insists disqualification of SMSFs is a last resort, and not a decision the tax office takes lightly.

"For the majority, we aim to help them get back on track…only in the most serious cases do we need to take strong enforcement action," she says.

The tax office only needed to issue 180 fines, restriction notices or cancellations in fiscal 2018, despite more than 17,000 reported breaches of SMSF regulations.

And in the first half of fiscal 2019, only 75 trustees from 53 funds have been disqualified. This is roughly in line with or lower than the figure from the previous year, when 257 trustees from 169 funds were cancelled.