By Peter Andreaseen – Manager of Superannuation
Did you know that as a trustee of a self-managed superannuation fund you are required to ensure that your fund has an investment strategy and that it is regularly reviewed?
When did you last review your investment strategy?
Does your investment strategy align with the goals and objectives of your self-managed superannuation fund?
There has been a lot of recent discussion in the self-managed superannuation sector about fund investment strategies with the Australian Taxation Office (ATO), as regulator of self-managed superannuation funds (SMSFs), currently focusing on this as an area of concern.
The ATO have recently sent out letters to thousands of SMSF trustees where they were concerned about the funds’ investments and the funds’ investment strategies not being in alignment with the objectives and goals of the members of the fund. The ATO have focused on funds that have little diversification of assets and funds using limited recourse borrowing arrangements to finance investments, however they have indicated that they will continue to expand this focus in the near future.
What is an investment strategy?
An investment strategy is the plan for how SMSF trustees will make and manage investments within the fund to meet the retirement goals of its members.
An investment strategy of a SMSF must be in writing, be tailored and specific, and have regard to the whole of the circumstances of the fund and its members including, but not limited to, the following:
Risk
This involves an assessment of the risk involved in making, holding and realising investments in the fund. The assessment should also take into account the likely return from these investments and have regard to the fund’s objectives and cash flow requirements.
Diversification
An appropriate investment strategy would generally be expected to spread the fund’s resources across a number and range of investments, in order to reduce the fund’s exposure to the risk of inadequate diversification. Where a fund intends to invest with a low level of diversification, the investment strategy should recognise this and outline why this is an appropriate strategy for the fund.
Liquidity
The investment strategy should have regard to the liquidity of the fund’s investments, its expected cash flow requirements and its ability to discharge its existing and future liabilities. The investment strategy should ensure a fund has sufficient liquid assets to meet liabilities as and when they fall due.
Existing and prospective liabilities
An appropriate investment strategy should ensure that the investments of the fund do not impact on its ability to meet its existing and prospective liabilities (i.e., this feeds off the liquidity requirement discussed in (c) above). This would include an assessment of whether the fund can meet its obligations to pay minimum pension payments to members drawing a superannuation income stream from the fund.
Insurance cover
An assessment should be made as to whether it is appropriate for the fund to hold insurance cover for one or more members of the fund. However, the fund is not required to acquire insurance cover for its members if, upon consideration, this is deemed unnecessary (e.g., where the members already hold personal insurance cover or have insurance cover through another superannuation scheme).
How often should an investment strategy be reviewed?
The ATO advise that an investment strategy should be reviewed “regularly” to ensure it continues to meet the needs of members depending on their personal circumstances. While not explicitly stated, it is implied that this would be at least annually and as a result of other “significant events”.
Other “significant events” may include, but are not limited to:
- A market correction;
- When a member joins or leaves a SMSF;
- When a member commences a pension.
What if a fund doesn’t have an investment strategy or the investment strategy is not current?
As part of the annual audit of a SMSF, the auditor will check whether the fund has an investment strategy in place, how it aligns with the objectives of the fund including the above-mentioned factors and how often it has been reviewed / revised. Where an auditor identifies that the investment strategy requirements of a fund are not being met, they will request that you address these concerns by either making an amendment to the existing strategy or adopting a new strategy.
Failure to address the auditor’s concerns may result in the auditor lodging an auditor contravention report with the ATO, which in turn may result in penalties being applied by the ATO to the trustee(s) of the fund.
What to do next?
We recommend that all SMSF trustees arrange for the investment strategy of their funds to be reviewed and if required a new or amended investment strategy aligning with the goals of the members and the fund’s investments be adopted.
A licenced financial planner may assist with the review and preparation of an investment strategy or you may undertake this action in your role as trustees of your SMSF.
Further information regarding investment strategies are available from the ATO website.
https://www.ato.gov.au/Super/Self-managed-super-funds/Investing/Your-investment-strategy/
