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Investment Diversification

SMSF trustees need to meet the diversification requirement under SISR4.09.

SISR 4.09 (2) states:

The trustee of the entity must formulate, review regularly and give effect to an investment strategy that has regard to the whole of the circumstances of the entity including, but not limited to, the following:

(a) the risk involved in making, holding and realising, and the likely return from, the entity’s investments, having regard to its objectives and expected cash flow requirements;

(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;

(c) the liquidity of the entity’s investments, having regard to its expected cash flow requirements;

(d) the ability of the entity to discharge its existing and prospective liabilities.

SISR4.09 requires trustees to consider diversification but this requirement is not compulsory.

However, SMSF trustees may be at risks of breaching SISR4.09 in relation to the diversification requirement if:

  • their SMSF have heavy asset concentration;
  • they have not given due consideration to the diversification;
  • SMSF investment is not regularly reviewed;
  • investment decisions are not clearly documented.

If your SMSF only has one asset, such as property or a single asset class, such as crypto-currency, you will need to make sure your SMSF to meet the following requirements:

  • you can prove that you have not put fund’s assets at risks;
  • the asset invested is an allowable asset in both investment strategy and trust deed;
  • your SMSF can meet its financial commitment, such as paying running costs, interest, pension and tax liabilities;
  • you regularly review the investment strategy to check if the investment objective has been achieved,  more diversification is necessary, any insurance policy is required etc.

 

 

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