As part of a campaign to ensure that trustees are mindful of their investment responsibilities, the Australian Taxation Office has started issuing letters to nearly 18,000 self-managed super fund trustees and their auditors, especially the need to consider diversification and liquidity when formulating and implementing the investment strategy of the fund.

This raises immediate concerns as to whether the ATO exceeds its regulatory position. Since the ATO does not have a prudential oversight role, these letters should not be viewed as an attempt by the regulator to limit the ultimate oversight of SMSF investments.

Nonetheless, investment options need to be matched with the investment rules laid down in the superannuation legislation as well as the trustees’ obligations to ensure responsible investment. The need to devise and execute an balanced investment strategy is an important component of these laws.

An investment strategy should be considered the blueprint of the SMSF to ensure that the investment priorities of the SMSF and the goals of members are achieved. The ATO has a primary function here to ensure that trustees are acting in accordance with these responsibilities.

These letters are part of a specific ATO initiative targeting SMSFs with a resource-limited lending structure where trustees have used borrowed money to buy, in most cases, a single asset, mainly real property, which also accounts for more than 90% of the assets of the fund.

Having a barrier for diversification is not unusual for SMSFs with lower member balances, as there is less money to invest. Nonetheless, trustees are still required to demonstrate that the related investment risks are properly recognised and mitigated.