A common topic that comes up a lot in our SMSF audits has to do with discrepancies in investment strategies. The investment strategy of an SMSF is a written plan for making, holding, and realising assets consistent with the members’ objectives and retirement goals. The plan should detail why and how the members have chosen to invest their retirement benefits to meet their goals, including information on asset types.
According to the ATO, every SMSF client must prepare and implement an investment strategy and review it regularly. Regular review is essential not only to ensure compliance with the laws, but also to make sure that the members’ retirement goals are on track and the plan meets their needs.
Certain events – such as a change in the number of members in the fund, the initiation of payments to a member, etc. – should always result in a strategy review.
As time goes by, changes may take place within the fund’s asset mix based on the members’ needs. For example, an SMSF fund can sell an asset and then buy a property with these funds. As long as the property is purchased at “arm’s length” (basically, the property is not purchased from a related party or another member of the fund), is permitted by the fund’s trust deed, meets the sole purpose test and follows all SMSF laws, this is allowed.
However, if the investment strategy is not updated to reflect this, then the change can cause problems and raise a red flag during an audit.
How can clients avoid their investment strategies being out of date?
One way we have dealt with this with our clients is by having a ‘templated’ approach, where instead of identifying the percentage of an investment strategy that should be allocated to a property – or a particular asset – we ensure that we list all the asset classes without allocating percentages.
This is well within ATO guidelines, which state that:
“The percentage or dollar allocation of the fund’s assets invested in each asset class 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 strategy, you must list material assets . . . and include the reasons why investing in those assets will achieve your retirement goals.”
By using this pragmatic approach, your client doesn’t have to keep updating their investment strategy every time they buy and sells assets within the fund. This saves a lot of time and “back and forth” when it comes to the SMSF audit, and makes things much more streamlined.
A clients’ investment strategy should not be a ‘set and forget’ and should be regularly reviewed particularly when certain significant events happen like a new member joins or departs the fund. But when it comes to buying and selling assets, to avoid common discrepancies in investment strategies, not listing the percentage or dollar allocation of the fund’s asset invested in each asset class can result in less queries, as long as all the asset classes are listed in the investment strategy.
For more on this topic, read the ATO website information on SMSF investment strategies.
Have questions about investment strategy changes within your clients’ SMSF? Contact the AYS team today.