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Eggs, baskets and diversified SMSF investment strategies

The ATO wants to ensure that, when an SMSF has a significant majority of its investments in a single asset class, the trustees have considered, as part of the investment strategy, the risks which could arise from that limited diversification.

       

 

Through the course of this article, we will consider the ATO requirements of SMSF trustees, and the auditor of the fund, regarding the issue of diversification of fund investments.

Is “having all of your SMSF eggs in the one basket” permitted?

The short answer is, yes. There is no legislative prohibition on the nature or proportion of the investments an SMSF may hold, although there are some additional requirements imposed if the SMSF holds certain assets, such as:

  • collectible and personal use assets,
  • units in a related unit trust, and
  • an investment made under a limited recourse borrowing arrangement.

While an SMSF trustee may hold virtually any investment available, there are legislative requirements concerning the formulation, and regular review, of the investment strategy of the SMSF, and this brings us back to the earlier reference to the ATO.

In August 2019, the ATO wrote to about 17,700 SMSF trustees (approx. 3 per cent of all SMSFs), as well as fund auditors, regarding what we have referred to earlier as “having all of your eggs in the one basket” — more formally referred to as the limited diversification of investments of those SMSFs.

Although the intent of the ATO correspondence was to remind trustees of the fact that the lack of diversification should be formally considered, an unfortunate component of the letter (at an early stage in the letter) was reference to penalties for non-compliance.

That overshadowed the intent behind the letters: to remind trustees and auditors of the requirements for the proper formulation of an investment strategy for their SMSF.

SMSF investment strategy requirements

The superannuation legislation requires that SMSF trustees [SIS Act s 52B(2)(f) and SIS Reg. 4.09(2)]:

  • “… formulate, review regularly and give effect to an investment strategy that has regard to the whole of the circumstances of the entity including…:

    (b) the composition of the entity’s investments as a whole, including the extent to which they are diverse or involve exposure of the entity to risks from inadequate diversification.”

So, while there is little stopping the SMSF trustee from lacking diversification in the investments of the SMSF, the trustee needs to have considered the various risks that may arise from that lack of diversification.

What circumstances may arise where it is likely there will be a lack of diversification?

A number of instances will occur in SMSFs which may result in the fund having significant exposure to one asset class, including:

  • the SMSF trustees know and trust investments in property, to the exclusion of other investment options;
  • the fund members invest in a variety of investments outside of the SMSF, and their aim for the SMSF is limited to holding a specific type of investment;
  • the fund members have most of their super in a public offer fund, but use the SMSF to hold an investment type, such as property, not available in the public offer fund;
  • for risk purposes, a decision may have been made to “quarantine” a real estate investment (such as a factory) in a second SMSF, so as not to risk the other SMSF in the event of a damages claim;
  • owners of a business establish an SMSF to hold the property from which their business operates, while each also has their own SMSF with their spouse; and
  • all available funds are applied to minimise the amount borrowed to acquire an asset under a limited recourse borrowing arrangement, with the eventual aim of broadening the investment range in the future.

Should trustees do anything to rectify the limited diversification?

Not necessarily. As mentioned, the lack of diversification is not the actual issue — the issue is whether the trustee of the SMSF has, as part of the creation or review of the investment strategy, provided adequate consideration to:

  • the extent to which the fund investments are diverse, and
  • the risks, including potential liquidity issues, from limited diversification.

Effectively, for trustees to be able to prove they have considered the potential risks of limited diversification, they will not only need to have a written investment strategy, but also written confirmation that the apparent lack of diversification, and resultant risks, have been considered.

Therefore, ensuring the investment strategy is up to date and that consideration has been given to the effects of any limited diversification is important.

Would planning for the future be beneficial?

Part of the risk from limited diversification is the forced action resulting from unexpected occurrences.

To plan for such eventualities is an important component of the role a prudent trustee would perform.

In the SMSF environment, that is generally referred to as an “exit strategy”.

Instances where an exit strategy would be of use include:

  • the situation of a two-member SMSF with a limited recourse borrowing arrangement, and planning for the occurrence of death, disability or divorce;
  • an agreement of business owners in the example covered earlier which could cater for the splitting of the business or the death or disability of a member, including a process to deal with the asset without causing an adverse impact.

Regardless of the ATO requirements, it is important for SMSF trustees to consider the risks which may arise from limited diversification, and the focus on those risks can be beneficial in formulating plans to mitigate any adverse impact.

How can trustees ensure they comply with the ATO requirements?

Step 1 in ensuring compliance is to confirm that the SMSF has a current investment strategy, as that is one of the covenants (the “non-negotiables”) under which SMSFs must operate.

Step 2 is to ensure that it is reviewed regularly — the ATO view is that regularly means at least annually.

Step 3 involves the specific considerations the trustee needs to cover in each review, including:

  • the investment risk and likely return;
  • the liquidity of the investments, having regard to cash flow requirements;
  • the ability to discharge current and future liabilities;
  • whether the trustee should hold insurance for the members; and
  • the composition of the “… investments as a whole, including the extent to which they are diverse or involve exposure… to risks from inadequate diversification”.

Formally undertaking a review of the investment strategy at least annually, such as when the SMSF financial statements have been prepared, with the review

  • ensuring the fund investments are within any parameters set out in the investment strategy, and
  • covering the matters detailed in Step 3 above, with particular attention to the diversification aspect, if applicable

will see the trustee effectively covering not only the ATO requirements but also meeting the specific covenant concerning SMSF investments.

More considerations

Mentioned earlier was the fact that some SMSF auditors had also received correspondence from the ATO. That occurred if they had audited an SMSF which has more than 90 per cent of its assets in a single asset class.

The correspondence effectively put auditors on notice to ensure trustees have given adequate consideration to the diversification issues we have covered in this article.

As a result, trustees can expect increased auditor scrutiny of their investment strategy documentation, including the diversification considerations.

Documentation

An anomaly with the investment strategy legislation is that, while the trustee of the SMSF must have an investment strategy, there is no stipulated requirement that it be in writing.

The same applies to the diversification considerations.

However, it would be a very brave trustee who did not support their decisions with proper documents as, without written proof, it is likely the auditor and the ATO will deem that no such investment strategy exists.

Topdocs recommends that an investment strategy be regularly reviewed and, if necessary, it be updated so as to ensure it remains reflective of the trustee’s intentions.

Additionally, if the investments are limited in their diversification, trustee resolutions confirming their deliberations of the risks involved must be prepared.

Conclusion

Having eggs in the one basket is permitted, but trustees need to have considered the risks and difficulties involved.

SMSF trustees have much to think about in the administration of their fund — the degree of diversification of investments is one consideration they should properly document.

 

 

Michael Harkin
27 November 2019
smsfadviser.com

 

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Retirement Planning

Retiring on your own terms is not always easy to achieve, however it is evident that those who plan for retirement are more likely to do so. Results also show that obtaining professional help during the pre-retirement years further improves the probability of attaining your retirement objectives.

The earlier you start implementing a plan the better the outcomes.

During one’s working life there is always an income to make ends meet when raising children, paying off a mortgage, etc.

Retirement planning is about the lifestyle you will have after you stop work and receiving employment income.  Planning focuses on issues such as how much superannuation is enough, taking a super pension, claiming the Age Pension, making superannuation contributions while receiving a pension from a super fund, estate planning and looking after your family.

Planning properly is becoming even more important now we are expected to live longer.  This greater need means that professional help has never been more important.

At Wybenga Financial we will provide the time and expertise needed to help you implement the best pre-retirement plan possible.  Contact us today to discuss how we can work together on: (02) 9300 3000 or .

Building Wealth

Investing your hard earned savings can be a complex task.  There are many issues such as levels of risk, market timing, asset classes, and your own goals, objectives and preferences that need to be considered. It can often seem a daunting task. At Wybenga Financial we have the expertise to assist you in taking control of your finances and making sure you are generating the wealth you need both now and in the future.

The first step is to create a plan. At Wybenga Financial we take great care in getting to know our clients and their future goals and objectives. We combine our knowledge of your personal goals together with an analysis of your current situation, to create a detailed, personalised plan that will help you meet your objectives. This plan will become your road map which outlines how we are going to meet your goals, whilst aligning all investment decisions to your specific risk tolerance.

After we have created your personal plan, we move to implementation. This is where we action the immediate changes set out in your plan, and put in place reminders for anything that is to occur in the future. As your professional advisers, we can action many steps on your behalf making the implementation of changes as painless for our clients as possible. We aim to make the process smooth and seamless, providing a holistic service that can be executed with ease.

The final and most important phase of the relationship with Wybenga Financial is the ongoing management and monitoring of your wealth. This ensures you are sticking to your plan and that your portfolio is aligned to your needs and attitude toward risk. An ongoing relationship ensures that we know when your circumstances change and that these can be recognised and reflected in changes to your investment approach.

While we are monitoring your portfolio from the perspective of your personal goals and situation, we also take into account the wider economic landscape and changes to legislation. We continually review and analyse our preferred investments in a structured and objective way. The benefit to our clients is that we are unemotional. This can be significantly beneficial over the long term.

At Wybenga Financial we can provide the time and expertise that will help you invest intelligently and prudently.  Contact us today to discuss how we can work together: (02) 9300 3000 or .

Personal Insurance

Life insurance isn’t just a cost, though it often feels like it.  You buy peace-of-mind that should a serious issue effect you then the consequences won’t unduly affect your family.  Insurance provides you with the ability to manage the financial and emotional impact of some of the more drastic events, whether personally or in your small business.

Insurance can’t replace a loved one but it can help reduce the financial burden by providing the capital to ensure your family has choices.

Many Australians are underinsured and the consequences can be very serious for families should there be a death or serious injury. A yes to any of the following questions means you may have a need for insurance coverage:

  1. Do you have a mortgage?
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  3. Do you have any personal loans?
  4. Do you have any credit card debt?
  5. Do you have dependents?
  6. Would your financial position be affected if you were to suffer from an illness or injury?
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We understand that it can be difficult determining the type and level of cover you might need, let alone choosing an insurer. We can assist by helping you determine your needs and recommend an insurer that is right for you.

At Wybenga Financial we know how to protect your wealth and will recommend solutions that best suit your needs. Contact us today to discuss how we can work together: (02) 9300 3000 or .

Superannuation

Superannuation is mandatory but taking an early and active interest in your retirement planning is critical to ensuring your benefits are maximised by the time you retire.  Many will have a superannuation scheme through employment but increasing numbers are starting their own Self-Managed Super Fund (SMSF).

For many, simply relying on employer contributions may not be enough to provide the lifestyle you desire at retirement. We can assist in building strategies to ensure your retirement goals are met and your required lifestyle is maintained throughout retirement.

It is always best to start saving and planning for your retirement as early as you can. 

At Wybenga Financial we know our job is to help you meet your retirement needs and we have the skills and experience to do this for you.  Contact us today to discuss how we can work together: (02) 9300 3000 or .

Self Managed Super Funds

Self-Managed Superannuation Funds (SMSFs) offer a good strategy option for many individuals, families and small business owners to build tax effective wealth and to protect assets over time. SMSFs are becoming popular for those who are ready to take control of their own super investments as they give you ultimate control and flexibility to manage your retirement benefits.

It must be noted though, that you will have increased responsibilities as a trustee of the fund. As a SMSF Trustee you need to keep up to date with all required regulations and keep up with the fast paced financial markets.

Wybenga Financial can work with you to understand your personal financial situation and decide whether a SMSF structure is appropriate for you. We will also make sure your assets are invested in the most effective way to maximise your retirement benefits.

Should you wish to consider establishing a SMSF then we can help with all aspects of the process from establishment to managing your compliance obligations.

Wybenga Financial would welcome the opportunity to discuss how we can help maximise your opportunities to grow your wealth through a Self Managed Superannuation Fund (SMSF).  Contact us today to discuss how we can work together: (02) 9300 3000 or .

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Your estate is made up of everything you own. This includes your home, property, furniture, car, personal possessions, business, investments, superannuation and bank accounts.

Having an estate plan is extremely important.  Having a will is just the first step in your estate plan. It is critical to consider what outcomes you would like for your estate and to ensure a plan is in place to achieve those outcomes, both including and beyond the terms of your will.

Wybenga Financial would welcome the opportunity to discuss how we can help ensure your estate is organised to ensure your plans are implemented as you wish.  Contact us today to discuss how we can work together: (02) 9300 3000 or .

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Tess Uncle

B.Sc, M.Com, CA, DipFP

Tess has over 22-years experience in Chartered Accounting Firms and in this time has had a broad range of experience in superannuation, taxation, business services, and financial strategy.

Over the last seven-years, Tess has turned her attention to Financial Planning, earning a Diploma of Financial Planning in 2015 and leading the newly established financial division of the Wybenga Group as a director of Wybenga Financial.

Tess’s mission is to bring the ethics and integrity of her Chartered Accounting background to the area of wealth management.

As a woman in a male dominated field, Tess is active in promoting gender equality in the industry through various programs and mentoring opportunities.

Using her depth of knowledge and experience in tax and accounting Tess is able to demonstrate a level of competence that is unique in the Financial Planning sector.

  • 2001 – Commenced employment with Wybenga & Partners and part-time accountancy studies
  • 2004 – Graduated Masters of Commerce from the University of New South Wales
  • 2005 – Admitted as an Associate Member of the Institute of Chartered Accountants Australia
  • 2007 – Promoted to Manager at Wybenga & Partners
  • 2012 – Appointed as Associate Director
  • 2015 – Awarded a Diploma of Financial Planning
  • 2016 – Appointed as Partner of Wybenga Group and Director of Wybenga Financial

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Adam Roberts

B.Bus, B.Sc, CA, DipFP

Adam has over 18-years experience in Chartered Accounting Firms and in this time has had a broad range of experience in superannuation, taxation, business services, and financial strategy.

Over the last seven-years, Adam has turned his attention to Financial Planning, earning a Diploma of Financial Planning in 2015 and leading the newly established financial division of the Wybenga Group as a director of Wybenga Financial.

Adam’s mission is to bring the ethics and integrity of his Chartered Accounting background to the area of wealth management.

Combining traditional accounting and financial services has been a welcome move for Adam, allowing him to operate and advise in the financial sector that has been a long time personal passion.

Using his depth of knowledge and experience in tax and accounting Adam is able to demonstrate a level of competence that is unique in the Financial Planning sector.

  • 2005 – Graduated Bachelor of Science from the University of Western Sydney
  • 2005 – Commenced employment with Wybenga & Partners and part-time accountancy studies
  • 2007 – Graduated Bachelor of Business from the University of Western Sydney
  • 2010 – Admitted as an Associate Member of the Institute of Chartered Accountants Australia
  • 2010 – Promoted to Manager at Wybenga & Partners
  • 2012 – Appointed as Associate Director
  • 2015 – Awarded a Diploma of Financial Planning
  • 2016 – Appointed as Partner of Wybenga Group and Director of Wybenga Financial

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Advisory Cadetships

What is an Advisory Cadetship?
An Advisory Cadetship enables you to commence your career whilst attaining the necessary university qualifications by studying part-time.

How does it work?
Generally, our cadets complete a relevant business or accounting degree at the University of New South Wales, the University of Technology Sydney, Macquarie University, or the University of Western Sydney.

The Firm provides 3-hours paid study leave per week to attend university. This can either be taken at the one time or broken between days depending on the individual’s requirements. In addition, the Firm provides paid study leave for both mid-semester and end-of-year exams.

We take the work life balance very seriously at Wybenga Financial and our cadets are encouraged to have a fulfilling life outside the office. A typical day will have you arriving at the office at around 8.30am with most days concluding at 5.30pm.

What are the benefits of an Advisory Cadetship with Wybenga Financial?
Our cadets benefit from the following:

  • Career path – on completion of their degree our cadets have significant practical experience which will assist them in advancing their careers
  • Work helps your studies – by working full-time our cadets are able to apply their practical knowledge in the university subjects
  • Camaraderie with other cadets – the Firm has a number of cadets at various stages of their career
  • Mentoring – cadets are paired with a senior staff member who oversees their progress and training both at work and with their studies
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  • Modern environment – including ‘socialising’ areas such as pool table and break out area
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  • Remuneration – working full-time provides a market salary and independence with salaries being reviewed every 6-months

What happens when I complete my degree?
The completion of your degree is the first step of what we hope to be a long and successful career with us. The next step is the commencement of a Diploma of Financial Planning followed by completing the requirements to become a Certified Financial Planner (CFP).

There are always progression opportunities for the right cadets and we are dedicated to the long term development of our staff.

Who should apply?
Current Year 12 students or first/second year University Students who:

  • want to commence their career in financial advisory;
  • are due to commence or are currently completing a part-time business or commerce degree at university with an advisory major;
  • want to gain valuable hands-on experience while completing their qualifications;
  • are looking for a friendly working environment;
  • are team players who display initiative;
  • have a commitment to self-development;
  • possess excellent personal presentation and communication skills; and
  • are motivated and mature minded.

How do I apply for an Advisory Cadetship?
To apply for a Cadetship position at Wybenga Financial send us your details. Please also include in your covering letter why you wish to do a cadetship, include relevant qualities you possess, main interests / achievements, and any previous employment.

Interested candidates should initially forward a resume/covering letter of no more than 3-pages. Please provide full details of contact information (telephone or e-mail).

What if I have more questions?
For further information about our Cadetship program, please send your enquiry to .