The ATO’s Investment Strategy Guidelines – are they warranted?

Feb 8, 2021, 09:33 AM

By Nicholas Ali

Nicholas Ali SuperConcepts SMSF expert

The release of the ATO’s Investment Strategy Guidelines provides guidance for Trustees and advisors, but it also means there will be penalties for not adhering to these guidelines – which is why it is vital that we examine them in detail.

How do the guidelines impact our clients’ SMSFs? Do they all now need to diversify and have their eggs in several baskets? What about funds heavily invested in property?

The theme in the guidelines is one of Trustees documenting the justification for an investment decision. What does this that means for On Just Terms SMSF with its Limited Recourse Borrowing Arrangement (LRBA)? While there is nothing in the legislation preventing a fund borrowing to invest largely in one asset class, the Trustees must be able to provide the rationale for the decision, considering the sole purpose of superannuation being to provide retirement benefits to the members.

According to the ATO, relying on a table of broad investment ranges in the fund’s investment strategy to simply satisfy compliance requirements will no longer cut it.

Was the ATO’s decision the right one? 

One could argue the ATO’s musings seem almost like a premonition, given the economic uncertainty caused by the ever-present pandemic. However, maybe the ATO’s guidance is as much optimism for the future as it is cautionary tale.

Now I don’t profess to be an investment expert (if I was, I wouldn’t be writing this), but stock markets, at least, and some elements of the property market, seem to be proving reasonably buoyant. So maybe some thoughtful planning is worthwhile now. It may well be the investments are fit for purpose, which is likely to be the case for many (if not most) SMSFs.

But for funds with older members or those approaching or in retirement, diversification is a way to preserve capital. Drawing down income streams from cash holdings and not having to liquidate distressed assets, giving them time to recover, is a logical course of action. For those funds that have younger members, such economic turmoil can actually be an opportunity.

With a diversified mix of asset classes and enough cash holdings to take advantage of the market downturn to purchase undervalued investments, there’s a sufficient time horizon to build healthy superannuation balances. That old chestnut “It’s time in the market, not timing the market” rings true all the time.

A lack of diversification, on the other hand, with funds largely invested in property via an LRBA, could lead to rent not being received due to the economic impact of the shutdown. Members potentially no longer have a job, which impacts on their ability to make contributions to the fund and have cash to pay back the loan. The fund itself may have asked for a deferral of loan repayments, which still need to be repaid. These issues impact on the nest egg of Australians and make those retirement goals that much harder to achieve.

Want to take a deeper dive into the ATO’s Investment Strategy Guidelines? Nicholas Ali will be speaking on behalf of SuperConcepts this year’s SMSFA National Conference which will be held in a virtual setting for the first time. You can book your place here.