Following on from our blog on the importance of an investment strategy review, the ATO has released further guidance for SMSF investment strategies.

The ATO stated that the investment strategy of an SMSF should be ‘your plan for making, holding and realising assets consistent with your investment objectives and retirement goals.’ To ensure the trustees meet the ATO’s regulations, they need to keep in mind when drafting or reviewing a strategy including

  • The strategy needs to be tailored to the relevant circumstances of the fund rather than a document which just repeats the words in the legislation and is generic
  • 0 – 100 % asset ranges are not suitable
  • Trustees need to articulate how they plan to invest their super or why broader asset ranges are needed to achieve the investment goals to satisfy the investment strategy guidance
  • Estimated allocations, percentage or dollar ranges for each asset class could be appropriate, but these ranges need to be more specific than the broad investment ranges between 0 -100%
  • Trustees are free to choose what types of assets the SMSF invests in, provided that the investments are permitted by the fund’s trust deed, not prohibited by superannuation law and meets the sole purpose test.
  • Investments are made in the best interest of all members

Trustees have been tripped up during recent audits where the fund has a generic, conflicting investment strategy, which states the trustees have diversified the assets of the fund but has a large part of the portfolio in a single investment. 

If trustees were to invest the predominant share of their retirement savings in one asset or one asset class, the investment strategy needs to document that the trustees have considered the risk with this lack of diversification. The ATO has specifically issued a warning around single asset concentration in an SMSF stating ‘this can expose members to a loss in the value of their retirement savings should the asset decline in value.’

Trustees need to be careful when providing return expectations from investments that they realistically match the investment return.  For example, having a 3% return plus inflation on a cash only fund is not realistically achievable and needs to be considered when reviewing an investment strategy.

Limited Recourse Borrowing Arrangements on a single asset raises additional risk, that fund Trustees need to document the added risk, and why this is suitable for the members.  A commentary on the additional risk, liquidity, and cash flow requirements of the fund and members should be provided.

The ATO recommends that investment strategies are reviewed annually, and documented. A review should also be conducted where certain events occur such as a market correction, a new member joining or departing the fund or when a member commences receiving a pension.

If you have any questions regarding investment strategies and our audit approach, please contact Ben or Michael on 1800 767 329