Overview
An SMSF’s investment strategy forms part of a fund’s specific compliance documentation. As such, the investment strategy should be tailored to individual fund circumstances and should not be a document merely repeating standard verbiage.
Each fund member has a unique set of circumstances and given the sole purpose of superannuation is the provision of retirement benefits, the investment strategy should explain how fund assets will meet each member’s retirement goals.
What should be included in the Investment Strategy?
Under superannuation law, factors must be considered regarding how SMSF trustees are going to achieve member objectives, given the whole circumstances of the fund. Therefore, the investment strategy should include (but is not limited to):
- The risk vs return profile of the asset classes
- Diversification
- Liquidity needs (how easily and quickly the assets can be converted to cash)
- Ability to discharge liabilities as they fall due
- Insurance needs of the members.
ATO Guidance
The ATO has published useful guidelines for trustees on developing an SMSF Investment Strategy[1]. The ATO make the point in their guideline, formulating the fund’s investment strategy is not achieved by specifying investment ranges of 0 to 100 per cent for each class of investment.
The guideline states trustees need to articulate how they plan to invest superannuation monies; rather than just use percentage ranges in each asset class, the investment strategy should state reasons why and how investing in those assets will achieve retirement goals. However, there is nothing in the legislation that states trustees must use asset allocation ranges. The guidelines state in these circumstances, where asset ranges are not used, trustees should list specific assets and include the reasons why investing in those specific assets will achieve retirement goals.
What does a compliant Investment Strategy look like?
The ATO does not provide any templates or examples of what constitutes a good investment strategy, but they do outline a couple of key points trustees must consider.
The first is having regard to diversification, which, not surprisingly, is one of the elements of Regulation 4.09 of the Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations). Whilst a fund is not required to be diversified and it may be completely reasonable to have either 100 per cent cash allocations or overweight one asset or one asset class, the ATO state trustees must justify how this lack of diversification is going to achieve the fund’s investment objectives and cash flow requirements:
- What is the rationale behind the lack of diversification?
- How is the fund going to satisfy its sole purpose for being in existence – that being the provision of retirement benefits for members?
The ATO also refer to “giving effect” to an investment strategy in the guideline. This is referred to in the operating standard in SIS Regulation 4.09. Interestingly the ATO decided to interpret this statement in the Regs, saying it means the fund’s investments are in accordance with the investment strategy, so the trustees are on track to meet member retirement goals. Again, the ATO emphatically states a range of 0 – 100 per cent in a broad spectrum of asset classes does not reflect proper consideration in satisfying the investment strategy requirements.
Reviewing the Investment Strategy
The ATO rightly state the fund’s investment strategy should not be a ‘set and forget’ document. As member life circumstances change, regular reviews of the Investment Strategy would be a logical course of action. Member retirement, disablement or death may mean assets need to be reviewed to ensure a fund remains fit for purpose. As part of this, a fund’s asset allocation may change to reflect an increase in fund liabilities if paying an income stream or death benefit. Review in this context does not necessarily mean re-writing the whole document. It could be done as part of the annual trustee minutes, which could then be provided to the fund auditor to show the trustees have met the requirement to review regularly and, where necessary, revise the investment strategy.
The role of the Auditor
As with recent case law[2] and ATO initiatives, the role of the fund auditor is brought into sharp focus. Trustees are warned if they do not comply with the investment strategy requirements under superannuation law, the auditor may notify the ATO by lodging an Auditor Contravention Report (ACR).
Given recent announcements by the ATO regarding the imposition of administrative penalties[3] (which can be significant and must be paid by the trustees themselves) for breaches of super law, the ramifications are severe. However, failure to address the factors mentioned above (such as the risk of a lack of diversification) can be remedied by attaching a signed and dated addendum to the strategy or a trustee minute which adequately addresses the requirements. This should then be shown to the auditor prior to the finalisation of the audit.
What is crystal clear from the ATO’s investment strategy guidelines is that using investment strategy templates with standard paragraphs, which have no regard to the individual circumstances of the fund, is not an appropriate approach when formulating an investment strategy for the fund. Standard investment strategy templates may be a good way of providing guidance, and as a conversation starter, but they should be relied on alone as justification for the trustee’s investment decisions.
What does Neo Super provide?
We are an innovative end-to-end SMSF service provider specialising in:
- SMSF administration and compliance
- Documentation services, including fund establishment, borrowing arrangements and pension documentation
- White label documentation and services for Intermediaries such as accountants and financial planners
- SMSF technical support, education, and training.
Further Information
For other service requirements, please contact our office at neo@neo-super.com.au or 1300 083 428.
[1] https://www.ato.gov.au/individuals-and-families/super-for-individuals-and-families/self-managed-super-funds-smsf/investing/your-investment-strategy
[2] https://www.fedcourt.gov.au/services/access-to-files-and-transcripts/online-files/asic-v-caddick
https://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/nsw/NSWCA/2018/110
https://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/nsw/NSWSC/2018/1502.html
[3] https://www.ato.gov.au/law/view/document?DocID=PSR/PS20203/NAT/ATO/00001
