The Australian Taxation Office will target owners and auditors of close to 20,000 SMSF’s who have pushed savings into single investment properties and cryptocurrency over possible breaches of the law.
It has been reported that the ATO will this month begin writing to SMSFs that have more than 90 per cent of savings tied up in a single asset class, warning them of their duty to comply with legal requirements to adopt investment strategies avoiding risky investments. Having such concentration in a single leveraged asset is considered a high risk strategy that doesn’t meet basic measures of investment diversification.
The move to clamp down on aggressive concentration of savings comes amid concerns of the sharp rise in SMSF owners taking on limited-recourse borrowing arrangements (LRBA) that allow super funds to borrow money to buy an investment property.
Regulators urged the government in February to ban property investment through self-managed funds, after the amount of LRBAs held by the sector rose to $40 billion, a 10-fold increase from the $400 million figure a decade ago.
Ahead of the recent federal election, Josh Frydenberg opted against a recommendation from the Council of Financial Regulators (CFR) — which includes the Reserve Bank, Australian Prudential Regulation Authority, Treasury and Australian Securities & Investments Commission — over concerns about LRBAs threatening the savings of individual retirees and the broader financial system.
The CFR raised the alarm that many low-balance SMSF owners had the majority of their savings tied up in a single property, which left nest eggs vulnerable to fluctuations in property prices and rental yields, and its “preferred option” after the three-year review was a ban.
It followed the government’s own financial system inquiry recommending a ban in 2014, the only recommendation not adopted by the Abbott government.
ATO assistant commissioner Dana Fleming said the purpose of the exercise was to remind SMSF owners “of their legal obligations” and “alert them to potential exposure to concentration risk and regulatory breaches”.
“We will also be writing to the auditors of these SMSFs to let them know of our concerns in relation to concentration risk,” Ms Fleming said. A breach of the regulation could result in a fine of up to $4200.
As loans can account for a large share of a particular SMSF’s assets, this can leave the borrower vulnerable to changes in property prices, risking pushing a retiree on to the age pension, which would increase the burden on the taxpayer.
When Mr Frydenberg knocked back the CFR, he announced the sector would be monitored for a further three years and report back.
In the meantime, the ATO has been forced to look at other ways to limit the aggressive growth in the SMSF property investment sector.
More than 40 per cent of SMSFs with an LRBA had concentration levels in a single asset class above 90 per cent, rising from 33 per cent in five years.
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