When did you last review your SMSF’s investment strategy?

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.

Of key concern is ensuring that trustees have considered diversification and liquidity of their assets when formulating and executing their fund’s investment strategy.

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 ensuring that if trustees wish to invest their assets in a certain way that they must clearly articulate their reasons for doing so.

The investment strategy available via the NowInfinity platform is designed to allow members to create a document that addresses all aspects of the legislation in this area, as well as the issues that ATO is evidently focused on.

Produced in conjunction with NowInfinity’s legal partner View Legal, the investment strategy is designed to allow tailoring on a fund by fund basis.  Furthermore, it sits seamlessly within the NowInfinity ‘5 in 1’ ecosystem, which includes both the array of superannuation products and the recently launched View Legal estate planning portal. An investment strategy should be considering 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 an SMSF invests in accordance with that strategy. This is where the ATO has a primary function to ensure that trustees act in accordance with these obligations.

The NowInfinity SMSF investment strategy takes into account all of the key issues that must, according to the superannuation laws, be addressed, including:

  • The risks involving 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 liquidity of the SMSF investments, having regard to expected cash flow requirements.

  • The SMSFs ability to pay current and future liabilities, including benefits to the members.

  • Considering whether to hold insurance cover for each member of the SMSF.

Importantly, the  trustee of an SMSF must have an investment objective and a strategy to achieve that objective in place, before it starts to make decisions about how to invest.

Of equal importance is that the investment objective and strategy is not set in stone.

It’s not uncommon for SMSFs with lower member balances to find diversification a challenge as there is limited money to invest. Nonetheless, an SMSF is still required to demonstrate that it adequately understands and mitigates the associated investment risks.  

For example, if an SMSF has invested in a large illiquid asset such as real property which may form the majority of the fund, it is important to ensure the investment strategy reflects the concentration and liquidity risk associated with this investment.

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

An investment strategy needs to be reviewed at least once a year and  evidenced to the SMSF’s auditor.

Similar to other areas of the NowInfinity platform (such as trust resolutions, binding death benefit nominations and estate planning), it is important to review an investment strategy whenever the circumstances of any members change or otherwise regularly (for example, yearly).

The following practical tips are often seen as useful reminders:

  • Document the investment objectives and strategy in writing

  • Set an investment objective that can be comfortably achieved with the underlying investments selected

  • The investments actually made must be anticipated by the investment strategy

  • Document all actions and decisions, with reasons, and retain them as a record in order to demonstrate that all obligations as a trustee have been satisfied.


Some context about what can go wrong …

The decision in Ryan Wealth Holdings Pty Ltd v Baumgartner [2018] NSWSC 1502 is a sobering case in the context of investment strategies, given the role an untailored strategy had in causing an SMSF auditor being held liable for losses suffered by an SMSF.

A key factor in the decision related to the, arguably generic, investment strategy that had been produced for the SMSF.

In summary the investment strategy included the following provisions that particularly caught the attention of the court:

Diversification

Consistent with portfolio investment theory, risk shall be minimised by investing in a spread of investments. This may be achieved by either:

  • investing directly in different types of assets, e.g. cash and fixed interest securities, shares and equities and property, either in Australia or overseas; or

  • investing with fund managers in their master funds and trusts so as to obtain a spread of underlying investment types.

Diversification and Asset Allocation

A normal investment range for each type of investment shall be:

  • Australian equities 0 to 100%

  • Australian property 0 to 100%

  • Australian fixed interest 0 to 100%

  • Cash and short term securities 0 to 100%

In reviewing the investment strategy, the court concluded that the decision of the auditor to issue the SMSF an unqualified opinion was unsupported by the material.  Therefore, the auditor had failed to exercise reasonable care and skill – not least of which because the 4 asset classes had suggested percentage ranges between 0% and 100%.

Furthermore, the court held that had the auditor exercised reasonable care and skill they would have:

  1. formed the opinion that a contravention of regulation 4.09 under the Superannuation Laws (relating to investment strategies) may have occurred or may be occurring, and therefore would have been under a statutory obligation to report the suspected non-compliance to the member and the regulator; and

  2. qualified their audit report appropriately to refer to the non-compliance with rules in relation to investment strategies.


 

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