Warning for SMSFs With No Investment Strategy

Recent changes to the regulations governing SMSFs reflect the concerns of the ATO that SMSF trustees are not adequately managing the investments of their Funds.

Now, not only is it a legal requirement to have an investment strategy but also the strategy must be reviewed and “given effect” on a regular basis.

“Many Trustees think that their one-page templated document that gives broad ranges for various asset classes is an adequate strategy for ATO purposes”, said Mr. Michael Roberts, a SMSF specialist adviser with Bailey Roberts Group. “But, in fact, they are leaving themselves open to penalties and fines in the event of an ATO audit that examines how well the documented strategy addresses the issues which the ATO consider as important.”

Roberts goes on to explain that the regulations require the Trustees to formulate and implement an investment strategy for the fund, having regard to the risk profile of the Fund Members, the diversification of its investments, the liquidity requirements of the Fund and its ability to pay its expenses, make benefit payments and meet its liabilities.

“And, recently, the ATO added to this list of considerations”, said Roberts. “The regulators also require Trustees to consider the life insurance needs of its members and expect to see evidence that the Investment Strategy is reviewed regularly.”

“These additional requirements certainly raise the expectations for the way Trustees manage their Super Fund – especially since Trustees can be penalised if they fail to have an investment strategy, or have one but fail to implement it.”

Most Trustees are concerned about investment restrictions and whether or not they can invest in certain investments – especially collectibles, such as art works or rare coins. Apart from a few asset classes, SMSFs can invest in almost anything as long as the investments comply with the regulations and the Fund’s investment strategy. For example, it is legal to invest most of the fund in a single asset, such as a property, but the reasons for doing so should be documented. “Having an Investment Strategy shows the Regulator that you, as Trustee of the Fund, have at least considered the issues in relation to managing the assets of the Fund on behalf of its members”, says Roberts.

The Investment Strategy does not need to be a complex document that provides an in-depth analysis of its investments. “Rather, the Investment Strategy should set out the Trustee’s investment objectives – that is, what that they want to achieve with the assets of their super fund in order to meet the requirements of the Fund’s members”, says Roberts. “From those investment objectives will flow the investment strategy, which explains how the Trustees intend to achieve those objectives.”

Roberts warns against using a standard template or form to prepare the Fund’s Investment Strategy. “Imagine if the ATO auditor were to ask you how the current investment portfolio will meet the Fund’s objectives”, says Roberts. “Chances are you will not be able to give an adequate answer if your Investment Strategy was a one-page form that you had perused for five minutes before signing.”

“That doesn’t mean to say that the Investment Strategy has to be a complex, in-depth document. Indeed, the strategy can be quite basic”, says Roberts. “The ATO is simply looking for an investment strategy that is meaningful and measurable, and describes how the Trustees intend to invest their money.”

Roberts suggests that it may pay to seek advice when a new SMSF is being set up. “Same as learning to fly a plane or the first time you build a house, it pays to get expert advice.”

Michael Roberts

Michael is a Director and Responsible Officer of Bailey Roberts Group. Michael brings to the Group twenty-nine years of experience in Financial Services and qualifications in Financial Planning, Business Management and Tax Law.

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