The ATO requires that every SMSF client must prepare and implement a strategy for their investments and review it regularly. Regular review is essential to not only ensure compliance with the law, but also to make sure that the members’ retirement goals are on track and plan meets with their needs.
Certain events – such as a change of membership in the fund, the commencement of pensions, modifying investments held, or even a market correction – should prompt a review of the strategy.
Asset Allocation Ranges
A common audit query raised is where the investments held in the fund are outside the permitted ranges. The trustees should take action to address that situation, which could involve adjustments to investments held to bring it back in line with the required ranges or updating the ranges.
The ATO has stated that:
- It is not a valid approach to merely specify investment ranges of 0 – 100% for each asset class of investment. Broad ranges do not reflect proper consideration to satisfy the requirements for the strategy.
- Trustees need to articulate the investment plan.
- Trustees need to consider diversification.
There is nothing in the legislation that states trustees must use asset allocation ranges. The guidelines state that where asset ranges are not used, trustees should list specific assets and include reasons why investing in them will achieve retirement goals.
It is also important not to bundle up investments – if there are unique investments, then they should be listed separately and note how the fund is meeting the sole purpose test of those investments.
Diversification
The ATO notes that the trustees need to consider diversification. Where there is a large portion of the fund invested in one asset class, the trustees must justify how this lack of diversification is going to achieve the fund’s investment objectives and cash flow requirements and note in the strategy the rationale behind the lack of diversification.
Where a fund has a larger percentage of assets in one asset class – such as cash, shares, property, unlisted trusts or unlisted companies – the auditor will expect to see the reasons for a holding a large percentage of the fund in that class, and there should be a recognition that the trustees are comfortable with the higher exposure in one asset, noting how liquidity requirements of the fund will be met.
Member’s Insurance
It is important the strategy for investments considers insurance for the members and if a decision is not to hold insurance, it should be adequately explained why not.
In short, a client’s strategy for investments should never be a ‘set and forget’, it should be regularly reviewed and tailored to the member’s needs and retirement requirements.
For more on this topic, read the ATO website information on SMSF investment strategies.
Contact the AYS team today if you have any questions.