If you have a self-managed superannuation fund (SMSF), it is essential to review your Investment Strategy regularly to check if it still suits your financial objectives and retirement goals.
SMSF Investment Strategy requirements
Self-managed superannuation fund (SMSF) trustees are required to prepare and implement an Investment Strategy by law. An Investment Strategy sets out what the fund can invest in. All investment decisions must be made in accordance with the Investment Strategy.
An Investment Strategy that you regularly review is not just a requirement under super laws, it will help you grow your retirement savings.
What needs to be included in SMSF’s Investment Strategy?
Your SMSF Investment Strategy should be in writing. It should also be tailored and specific to the relevant circumstances of your fund rather than a repeat of legislation.
Relevant circumstances may include (but are not limited to) personal circumstances of the members such as their age, employment status and retirement needs, all of which influence investment risk. Strong investment strategies should explain how the investments will meet each member’s retirement objectives.
In particular, under the super laws your strategy must consider the following specific factors in regard to the whole circumstances of your fund:
- 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)
- 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
- Whether to hold insurance cover (such as life, permanent or temporary incapacity insurance) for each member of your SMSF
When formulating your Investment Strategy, it is not a valid approach to merely specify investment ranges of 0 to 100% for each class of investment. You also need to articulate how you plan to invest your super or why you require broad ranges to achieve your investment goals to satisfy the Investment Strategy requirements.
The percentage or dollar allocation of the fund’s assets invested in each class of investment should support and reflect your articulated investment approach towards achieving your retirement goals. If you choose not to use allocated portions or percentages in your Investment Strategy, you should ensure that material assets are listed in your Investment Strategy. You should also include the reasons why investing in those assets will achieve your retirement goals.
Restrictions under the super laws
You are free to choose what type of assets you may invest in, providing those investments:
- Are permitted by your fund’s trust deed
- Are not prohibited by the super laws
- Meet the sole purpose test.
For instance, you need to be aware of the in-house asset rules and acquisitions from related party rules. You also need to be aware of the non-arm’s length income rules for income tax purposes.
Where your investments breach the super laws, the ATO can take compliance action against you. Depending on the severity of the breach, the ATO may apply penalties and potentially disqualify you as a trustee.
How often do you need to review SMSF’s Investment Strategy?
Your Investment Strategy should not be a ‘set and forget’ document. You should review your strategy regularly to ensure it continues to meet the current and future needs of your members depending on their personal circumstances.
Certain significant events should also prompt you to review your strategy, such as:
- A market correction
- When a new member joins the fund or departs a fund
- When a member commences receiving a pension. This is to ensure the fund has sufficient liquid assets and cash flow to meet minimum pension payments prior to 30 June each year.
You should also review your strategy at least annually and document that you have undertaken this review and any decisions made arising from the review. For example, you could do this as part of the annual trustee meeting minutes. You should then provide these minutes or other evidence of a review to your auditor. This will show that you’ve met the requirement to review regularly and, where necessary, revised your Investment Strategy.
What happens if your SMSF Investment Strategy is not compliant?
If your auditor identifies that you have breached the Investment Strategy requirements then you should fix the breach. If your strategy failed to adequately address some of the factors mentioned above, such as the risk of inadequate diversification, you can fix this by attaching a signed and dated addendum to the strategy or a trustee minute that adequately addresses the requirements. You should then show this to your auditor prior to the finalisation of the audit.
If you failed to invest in accordance with your strategy, you should revise your strategy to ensure it reflects your fund’s investments and how those new investments will meet your retirement objectives. You should then make sure you regularly review and adhere to your new strategy in the future.
Your auditor will only need to lodge an auditor contravention report (ACR) notifying the ATO of the breach if it meets the ACR reporting criteria. For most funds, the criteria will be met if either:
- The auditor has identified the same breach in a previous income year and it has been repeated in the current income year
- It is a breach from a previous year that remains unrectified at the time of audit.
However, the criteria may also be met if the fund is less than 15 months old and the value of any single breach exceeds $2,000.
If your auditor is required to lodge an ACR and the breach has not been rectified, the ATO will ask you to rectify the breach.
A penalty of $4,200 (as indexed each 1 July) can be applied to each individual trustee or the corporate trustee for a breach of the Investment Strategy requirements. The directors of a corporate trustee are jointly and severally liable to pay this penalty.
Who can help prepare, update or review an Investment Strategy?
If you require assistance with the preparation of an Investment Strategy, you should consider seeking advice from a SMSF administrator or a licensed financial adviser. Note that your usual SMSF adviser may not be a licensed financial adviser and is legally capable of assisting you. They may be able to guide you on where to obtain resources such as an Investment Strategy template.
Take care when obtaining standard Investment Strategy templates as these may not satisfy the super rules. They must be appropriately tailored to your fund’s particular circumstances as discussed above and reviewed regularly as required by the super rules.
For further assistance with your SMSF Investment Strategy, please contact us on 08 8431 0022. If you need professional financial advice on your Investment Strategy, please contact our KMT licensed financial adviser.
This guide content was referenced from the ATO website. Before taking any actions based upon such information, we encourage you to consult with a SMSF administrator, financial planner or appropriate legal professional. KMT Partners do not provide any kind of legal advice. The use or reliance of any information contained in this guide is solely at your own risk.