Some SMSF Investors Unaware Of Diversification Importance

Trustees need to ensure there is sufficient cash available to meet the loan repayments and pension payments if members are in the retirement phase.

The tax office is closely monitoring the use of the LRBA’s by self-managed super funds where property represents a significant proportion of the assets held. The concern is that a sharp decline in the value of the property poses a risk to a member’s retirement savings. This is commonly referred to as concentration risk.

Section 52(6) of the SIS Act and regulation 4.09(2) of the SIS Regulations, requires trustees to prepare, implement and regularly review an investment strategy for their self-managed super fund. The investment strategy needs to include, among other things:

  • the risks associated with the fund’s investments
  • the importance of investment diversity and the fund’s exposure to risk due to insufficient diversification
  • expected cash flow requirements

Therefore, as trustees are legally obliged under the Sis act to address diversification and liquidity risk, they need to understand and address the underlying risk of overexposure to a single asset class and have strategies in place to ensure the risk is managed.

Trustees need to ensure there is sufficient cash available to meet the loan repayments and pension payments if members are in the retirement phase. Also, they need to have strategies in place for when the property cannot be leased, there are unexpected costs such as those related to renovations and improvements, or if contributions are no longer made to the fund due to unemployment or other circumstances.

According to some reports, SMSF members are receiving mailed warnings from the ATO in regards to risky property investments that are being held in their funds.

The ATO have said: “We will contact self-managed super fund (SMSF) trustees and their auditors where our records show a lack of investment diversification. We ask trustees to ensure their investment strategy complies with regulation 4.09 of the Superannuation Industry (Supervision) Act (SISA).

Generally, greater diversification of investments is the best way to reduce risk. A qualified SMSF expert will be able to assist in the creation and implementation of an effective investment strategy so that your fund can be utilised to its greatest extent.

The experienced SMSF team at Paris Financial are ready to assist with your fund. Contact us today to discover how we can help you.

Share On:

Other News

All the latest from our small business tax champions.

Why you landed here

Phillip Anthony Partners joins Paris Financial East Melbourne

We are pleased to share that the team at Phillip Anthony Partners have merged with Paris Financial. Our team at Paris Financial can provide you with a large range of quality financial services with over 65 people located across two convenient locations in Blackburn and East Melbourne.

Paris Financial shares the same philosophy as Phillip Anthony Partners of providing a value focused and high quality service for each of our clients. We look forward to assisting with your accounting needs.