When did you last review your SMSF investment strategy?

A group of accountants in North Sydney discuss financial planning and strategy over documents and a laptop.

You may be aware that the Australian Tax Office (ATO) has issued letters to nearly 18,000 SMSF trustees as part of a campaign to ensure trustees are aware of their investment obligations.

Ensuring that trustees have considered the diversification and liquidity of their assets when formulating and executing their SMSF investment strategy is critical.

Importantly, it must be noted that the ATO letters are not an attempt to regulate and limit the control and freedom that SMSF trustees have but rather ensure that if trustees wish to invest their assets in a certain way, they must clearly articulate their reasons for doing so.

An investment strategy should be considered the SMSF’s blueprint when dealing with the fund’s assets to ensure the SMSF’s investment objectives and members’ goals are met. It provides the parameters to ensure you invest your money in accordance with that strategy. This is where the ATO has a primary function to ensure that trustees act in accordance with these obligations.

An SMSF investment strategy must take into account the following items:

  • The risks involved in making, holding and realising the SMSFs investments, their expected return and cash flow requirements of the SMSF.
  • The diversification and composition of the SMSF investments.
  • The SMSF investments’ liquidity, regarding expected cash flow requirements.
  • The SMSFs can pay the current and future liabilities, including benefits to the members.
  • Considering whether to hold insurance cover for each member of the SMSF.

As a trustee of your SMSF, an essential requirement is to have an investment objective and a strategy to achieve that objective before deciding how you want to invest your SMSF money.

Of equal importance is that the investment objective and strategy are not set in stone. You can change the investment objectives you have set for your SMSF anytime.

It’s common for SMSFs with lower member balances to find diversification challenging due to limited investment money. Nonetheless, you must demonstrate that you adequately understand and mitigate the associated investment risks.

If you find yourself in this position, it is essential your investment strategy reflects these risks.

For example, if you have invested in a sizeable illiquid asset such as real property, which may form the majority of your fund, it is timely to ensure your strategy reflects the concentration and liquidity risk associated with this investment.

Where you have an adequate investment strategy that deals with these risks and can provide the necessary evidence to support your investment decisions, no further action is expected.

Where your fund has not complied with its investment strategy requirements under superannuation law, you may be liable to administrative penalties imposed by the ATO as a Regulator of the SMSF sector.

Your investment strategy does need to be reviewed at least once a year, and this will be evidenced by your approved SMSF auditor. It is also essential to review your strategy whenever the circumstances of any of your members change or as often as you feel it is necessary. The following practical tips will help you keep on top of your obligations:

  • Put your investment objective and strategy into writing
  • Set an investment objective that you can comfortably achieve with the underlying investments you are comfortable investing in
  • There is no template for an investment objective and strategy, but make sure they reflect how you intend to invest your SMSF money
  • The investments you make must be accommodated by the investment strategy you have set
  • Most importantly, document your actions and decisions, as well as your reasons, and keep them as a record to demonstrate that you have indeed satisfied your obligations as a trustee in this vital area

As always, if you have any queries, please contact us.

Kreston Stanley Williamson Team

*Correct as of October 2019

*Disclaimer – this article has been produced by Kreston Stanley Williamson as a service to its clients and associates. The information contained in the article is of general comment only and is not intended to be advice on any particular matter. Before acting on any areas in this article, you must seek specific advice relating to your particular circumstances. Liability is limited by a scheme approved under professional standards legislation.

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