What’s Your SMSF Investment Strategy?
This financial year we have received an increasing amount of questions regarding investment strategies for SMSF compliance. The top two questions being:
- What is an investment strategy?
And…
- Why do I need to prepare one?
Well, according to the Australian Taxation Office: (1) “Your investment strategy is your plan for making, holding, and realising assets consistent with your investment objectives and retirement goals. It should set out why and how you’ve chosen to invest your retirement benefits, in order to meet these goals.”
And: (2) “The superannuation laws require that you must prepare and implement an investment strategy for your self-managed super fund (SMSF) which you must then give effect to and review regularly.”
In other words, you are required to have a plan and, when your objectives change, you are required to make a new plan.
“The Australian Taxation Office says the strategy must be reviewed, at least annually, and when “significant events” occur, including a market correction. The strategy should be in writing and must be tailored to the specific circumstances of each fund, ‘rather than a document which just repeats the words in the legislation,’ the ATO says. Relevant circumstances include member ages, employment and retirement goals including risk appetite, with the strategy required to explain how investments meet each member’s objectives.”
— “Why it’s time to update your SMSF investment strategy,” Morningstar Spotlight, Anthony Fensom, 22 March 2021.
So, the ATO have made it clear what an investment strategy is, and that having a complying investment strategy is a critical element for every SMSF. We can also expect that it will continue to be a key focus in the future.
As stated above, fund trustees are required by law to prepare and implement an investment strategy that is tailored to the relevant circumstances of the fund.
Some important elements that should be contained in every strategy include:
- A consideration of member ages, anticipated retirement dates, and how their benefits will be paid.
- The risks of buying, holding, and selling fund assets.
- The composition of fund assets, including, considerations for diversification (or lack thereof) and how that meets the fund’s needs.
- A consideration of how the fund will convert assets to cash to pay its tax liabilities and other fees.
- Ability to pay benefits when a member retires (through lump sums or regular pension payments).
And finally…
- Insurance for each member.
The ATO puts the responsibility squarely on the fund auditor to ensure the trustee has met their obligations. The auditor’s role is to ensure:
- The SMSF had a complying investment strategy in place for the financial year.
- The fund’s investments during the financial year were in accordance with the strategy.
- The strategy has been reviewed, at some stage, during the year.
While most auditors will work with clients to rectify issues with their investment strategy they will, in some cases, be obliged to lodge an auditor contravention report (ACR).
The ATO requires the auditor to lodge an ACR where they have identified the same breach in a previous income year, and it has been repeated in the current income year, or where it is a breach from a previous year that remains unrectified at the time of audit. Auditors tend to be even more demanding for funds that are less than 15 months old. Clearly it is preferable to avoid an ACR, as they incur additional fees and may lead to further action by the ATO.
Typically, an auditor will charge anywhere between $250 to $500 to lodge an ACR, so if you can arrange an investment strategy for less than that, you can save yourself some money and get a compliant strategy!
One hidden benefit is that the strategy forces you to have conversations between all the fund members to ensure everyone understands their outlook. If Mum and Dad are planning to retire on a pension…and the kids are in denial…it’s better to face up to it. The parents can retire, knowing they’re going to be okay, and the kids can roll their entitlements out, or make their own plan, so they are not unfairly impacted.
