Time to rethink your SMSF investments?

Your investment strategy is no longer just a compliance document, but instead should be used as a roadmap for how your fund will meet the needs of all members. The ATO has released extensive guidelines on SMSF investment strategies and it is a must-read for every trustee explains the Eureka Report’s Patrick Duke.

As an SMSF trustee, you need to meet the needs of all members of your SMSF in order to satisfy the sole purpose test. Your fund needs to be maintained for the sole purpose of providing retirement benefits to your members, or to their dependants if a member dies before retirement.

Here are five key take-outs from the ATO’s Your self-managed superannuation fund (SMSF) investment strategy to ensure you are meeting your duties:

1. Personalise your investment strategy

Include relevant details about each member including age, employment status and retirement needs. Your investment strategy should clearly explain how the fund’s investments will achieve each member’s retirement objectives, including considering the investment risks, diversification and liquidity.

You should also consider the fund’s ability to pay benefits to members (such as pension payments to a retired member) and whether to hold personal insurance for members.

2. 0-100 per cent asset allocation ranges don’t cut it anymore

When determining allocations, you can specify percentage or dollar terms. You should explain the reason why the range or allocation will help achieve the fund’s investment objectives. For example, a fund looking to achieve a return of CPI 5 per cent will require a large allocation to Australian Shares, International Shares or Property because of the return profile (capital growth and dividends) of these asset classes is aligned to the investment objective.

Keep in mind that short term variations aren’t considered a variation from your investment strategy. This may include the sale of an asset such as a property or shares which will then be re-allocated within a reasonable timeframe.

3. Your investment strategy is not ‘set and forget’

The ATO suggests you review your investment strategy at least yearly and document the review. You should also review your strategy in the event of (but not limited to) the following situations:

• Market correction
• When a member joins or departs the fund
• If you are adding or removing personal insurance to the fund
• If a pension is commenced or lump sum was taken from the fund

4. It is ok to own a single asset

There are risks associated with owning a single asset or asset class, such as concentration and liquidity risk. These risks may result in undesired outcomes for members such as the inability to fund pension payments or a market event resulting in failing to meet retirement objectives. There are cases where this may be appropriate based on the fund and members’ circumstances. The relieving indication is the guidance appears to relax views on owning a single asset or asset class so long as it meets the investment objectives of all members. If your fund owns a single asset or asset class, your investment strategy should spell out how you believe the allocation will achieve the fund’s objectives; however, be careful to address the risks.

5. Get professional advice

As always, if you don’t feel as though you need assistance with the preparation of your investment strategy or other SMSF matters, seek advice from a professional with the appropriate SMSF qualifications.

The ATO’s guidance is a comprehensive illustration and the perfect tool for you, relating to your SMSF investment strategy. It is worth noting that there are several consequences if you fail to fix a non-compliant SMSF investment strategy. These include mandatory reporting to the ATO and a penalty of up to $4,200 for each trustee. Be sure to follow the guidance when you next review your SMSF investment strategy or refer to a qualified professional.

Originally published February 2020 by the Eureka Report. 

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About Patrick Duke 

Patrick is a financial advisor working at Integral Private Wealth’s Brisbane Office. Prior to Integral, he worked with The Westpac Group for over 14 years. Patrick holds a Master of Financial Planning Degree with Griffith University and is a Member of the Financial Planning Association (FPA).

Follow him on LinkedIn.