Your SMSF is required to have an investment strategy: a plan for making, holding and realising investments in line with the fund’s investment objectives. It’s a common misunderstanding that the strategy should simply be a statement of the types of investments in which your SMSF will invest. According to the ATO, who are responsible for regulating SMSFs, that’s not sufficient – trustees need to explain why the fund has chosen to invest in each asset class.
They also are interested in how the strategy provides benefits to each fund member on retirement or will provide it to their dependants after the member’s death. And don’t be surprised if the auditor of your SMSF starts to take greater interest in the investment strategy as it is required to be reviewed regularly.
If your SMSF’s investment strategy is very general and has not considered the risks in making, holding and realising investments in addition to the likely returns, it may have a problem complying with superannuation law. As a trustee, you need to consider the objectives of the fund and any cash flow requirements plus the members’ insurance requirements.
Superannuation law requires that a fund trustee must consider:
- the fund’s investments as a whole and include the extent to which those investments are diverse or involve exposure of the fund to risks from inadequate diversification,
- the liquidity of the fund’s investments, having regard to its expected cash flow requirements,
- the ability of the fund to discharge its existing and prospective liabilities, and
- whether the trustees have considered insurance cover for one or more fund members.
Your adviser may recommend a review of your SMSF’s investment strategy to fine-tune any change in the fund’s cash flow requirements, investments and maybe the insurance needs of members. If you don’t have an adviser, then it could be time for you to review it yourself.
Investment Strategy and Fund Audits
The ATO now takes a much greater interest in investment strategies, especially those which have high concentrations of investments in one asset class, such as property, shares, cash or fixed deposits. They sent out around 18,000 letters late last year to remind SMSF trustees that the fund’s investment strategy should justify why investments were made in this manner and explain any lack of diversification.
In the first instance, they have placed the onus on fund auditors and trustees to make any required changes. We have seen a renewed interest on the part of auditors in closely examining funds to ensure investments are consistent with the fund’s investment strategy, including the reasons behind high concentrations in one asset class. This is usually brought to the attention of the trustees in the auditor’s Management Letter but in the worst cases may be brought to the attention of the ATO.
If your SMSF’s investment strategy doesn’t adequately fulfill its legislated requirements, you generally have one of two options:
- Replace your SMSF’s current investment strategy with one that does meet the Superannuation Industry (Supervision) Act; or
- Provide an amendment to the current investment strategy which provides additional information on how the trustee(s) have considered the above requirements.
In most situations, auditors have accepted amendments to the investment strategy that includes the additional information required. Such an amendment typically details how the trustee has considered the SIS requirements and why investments have been made, with respect to the various needs of fund members. It should directly and comprehensively cover areas in which the strategy has been identified as deficient.
What you need to do
Your SMSF’s investment strategy requires you to maintain an ‘eagle eye’ to ensure that as circumstances change your investments are adjusted accordingly. As examples, adjustments may be required:
- when cash flows required of the fund change with the commencement or cessation of an income stream;
- where a lump sum must be paid in cash; or
- where the membership of the fund changes.
Besides these particular circumstances, the law requires a regular review (in most cases, annually), and confirmation from the trustee to the ATO that this has taken place.
Subscribe below to SMSF News to receive my latest articlesGraeme Colley, Executive Manager, SMSF Technical and Private Wealth, SuperConcepts
While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.
This article is not intended for distribution or use in any jurisdiction where it would be contrary to applicable laws, regulations or directives and does not constitute a recommendation, offer, solicitation or invitation to invest.