ATO diversification probe may cause audit headaches

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Some SMSF trustees with annual returns due in October may need to re-audit their accounts for the last financial year, following a warning from the ATO that funds which are highly concentrated in one asset must present a compliant investment strategy to their auditor or risk penalties of over $4,000.

Off the back of news last month that the ATO would write to almost 18,000 SMSFs that held 90 per cent or more of their funds in one asset, trustees have this week begun to receive their letters, which warn that they may be in breach of diversification requirements contained in the SIS Act operating standards.

A letter shared by Verante Financial Planning adviser Liam Shorte on Twitter shows trustees are being asked to review their investment strategy to ensure it provides evidence they have considered diversification, the risks associated with inadequate diversification, how the likely return from their investments measures up to their retirement objectives, the liquidity of their investments and member insurance needs.

“Have your investment strategy ready to provide to your SMSF’s approved auditor as part of your next audit. This will help your auditor form an opinion on your fund’s compliance with these requirements,” the letter reads.

It also warns that if the trustee’s auditor identifies non-compliance in any of these areas, the trustee could be liable for a $4,200 breach penalty.

SMSF Alliance principal David Busoli said with the onus heavily on auditors to root out substandard investment strategies, the industry was likely to take a conservative approach.

“Auditors have been targeted a bit in the last year for damages claims and the like, and they won’t be taking any risks in relation to investment strategy,” Mr Busoli said.

Mr Busoli added the letters were likely to cause administrative headaches for affected trustees, as some whose fund returns were due in October would have already had their accounts audited and may need to consider redoing the process if they were concerned about the compliance of their investment strategy.

“For those who have gone to audit, if the trustee receives a letter saying they’re one of the targeted funds, I would suggest they go back to their accountants and ask that the accounts be re-audited with a new investment strategy,” he said.

If trustees had changed auditors since the previous financial year, they would also need to communicate proactively with their new auditor to ensure they were aware of the requirement to take a closer look at their investment strategy, Mr Busoli said.

“There will be some clients who are using a different auditor than they did last year, so this year’s auditor will not be the one that’s getting the letter from the ATO,” he said.

This article was originally published on the SMSF Advisor website.