Getting the SMSF Investment Strategy Right

In recent years there has been an increased focus from the ATO (and therefore SMSF auditors) on ensuring that SMSF investment strategies are compliant. As a result, it is important that Trustees and Advisers understand the requirements of having a compliant investment strategy for their fund.

In formulating an investment strategy, the SIS requires that Trustees consider:

• Risks involved in making, holding, and realising, and the likely return from your fund’s investments regarding its objectives and cash flow requirements.
• Composition of your fund’s investments including the extent to which they are diverse (such as investing in a range of assets and asset classes) and the risks of inadequate diversification.
• Liquidity of the fund’s assets (how easily they can be converted to cash to meet fund expenses such as the cost of managing the fund and income tax expenses).
• Cash flow and the fund’s ability to pay benefits (such as when members retire and require a lump sum payment or regular pension payments) and other costs it incurs.
• Insurance cover (such as life, permanent or temporary incapacity insurance) for each member.

Are They Any Investment Restrictions?

One of the benefits of an SMSF is that there are few restrictions, and that the investment universe is almost unlimited provided that the investment is:

• permitted in the SMSF Deed;
• not prohibited by the SIS Act;
• meets the sole purpose test.

How Often Should a SMSF Investment Strategy Be Reviewed or Updated?

An investment strategy should be reviewed at least annually, and this should be documented in the annual Trustee minutes as part of the year-end financial accounts.

The Investment Strategy should be updated if there is a significant change to the fund for example:

• a large market downturn;
• when a member is added or departs the fund;
• when a member starts a pension to ensure that the fund has enough cash flow to meet minimum pension payments.

Auditor’s Role

Part of the auditor’s role when assessing a fund is to check that the investment strategy meets the requirements of the SIS Act. In particular, the Auditor will check:

• That the investment strategy was in place during the financial year;
• That the fund’s investments during the financial year were in accordance with the strategy;
• The strategy has been reviewed during the year.

Investment Strategy Tips & Traps

Common tips and traps that Advisers and Trustees should be aware of include:

• Allocating 100% to any investment other than cash, i.e. if the maximum allocation to Aust equities is 100% then the fund will have no cash.
• Setting the maximum percentage too low for property. i.e. if a fund invests in a property it is likely the allocation will be above 70% and as high as 95%. The investment strategy should allow this.
• The risk profile percentages not adding up to 100%.
• The investment strategy not being regularly reviewed and updated.
• Majority of Trustees not signing the investment strategy.