A Self Managed Superannuation Fund (SMSF) investment strategy is a documented plan about your investment objectives, retirement goals and specific to your circumstances. It is important to articulate how you plan to invest your super.
Superannuation law requires Trustees to prepare an investment strategy, and the Australian Taxation Office (ATO) ensures SMSF’s have met this obligation via the audit process.
Documenting an investment strategy
The ATO has recently provided guidance, particularly to the composition of investments, i.e. diversification, and what an SMSF’s investment strategy should include.
When writing an investment strategy, take into consideration the following points;
– to the Trustees, considering their current position of the SMSF (but not limited to) members age, employment status and retirement needs/goals. It should outline the SMSF’s overall objective and how the SMSF plans to meet it.
– involved in purchasing, holding, and selling investments. Risk often refers to the chance an outcome or investments actual gains will differ from an expected outcome or return. It includes the possibility of losing some or all of the original investment.
The Trustees should explain why they are choosing assets over other assets/asset classes. Taking into account how the assets risks and likely return are going to meet the overall objective of the SMSF and cash flow requirements.
Composition of investments
– including how diverse (such as investing in a range of assets and asset classes) plus the risks of inadequate diversification.
Choosing to invest in a variety of assets, allows for the spread of investment risk, also known as a diversified portfolio.
Although the super laws allow Trustees to invest all their retirement savings in one asset or asset class, it can pose risks to returns, volatility and liquidity.
If investing in one asset or asset class, it can lead to a concentration of risk. Therefore, write down how you have considered the risks associated with a lack of diversification. Including how you still think the investment will meet your fund’s expected investment objectives, returns and cash flow requirements.
The ATO requires the Trustee to disclose the fund’s assets invested in each asset class to reflect either as a percentage or dollar allocation. For example, the SMSF holds assets in ‘Cash’ between 0% to 30% and ‘Australian Equities’ 70% to 100% at any one time during the year.
The allocation should support and reflect your articulated approach towards achieving your retirement goals.
If you choose not to use allocated portions or percentages in your investment strategy, ensure you list material assets in your investment strategy. Do not forget to include the reasons why investing in the chosen assets will achieve your retirement goals.
The ATO is concerned where Trustees have purchased an asset using a limited recourse borrowing arrangement (such as property). This arrangement can expose members to a loss in the value of their retirement savings if the asset declines in value. It can also trigger a forced asset sale if the loan covenants (for example, the loan to valuation ratio) is breached.
Liquidity of assets
– refers to how easily the assets of the SMSF can be converted to cash to meet the super fund expenses (such as the cost to manage the fund and income tax expenses).
– is the ability to make such payments when members retire and require a lump sum payment or regular pension payments.
– needs to be considered for each member. Although, there is no requirement for the SMSF to hold life insurance cover for its members (such as life, permanent or temporary incapacity insurance).
Reviewing an investment strategy
Reviewing your investment strategy regularly allows you to assess if the fund is meeting current and future needs of the members and their personal circumstance. For example, the following significant events should prompt a review;
- a market correction
- when a new member joins the fund or departs a fund
- when a member commences receiving a pension.
If there were no significant events since the last review, record you have undertaken the review, including any decisions. Alternatively, review the strategy on an annual basis, recording any updates and trustee decisions arising from the investment strategy yearly review.
During the audit of the financial statements and supporting documents, an auditor will check if the fund has met the investment strategy requirements as per the super laws. If the investment strategy does not comply the auditor may need to notify the ATO by lodging an auditor contravention report (ACR). Before any potential penalties are issued, the ATO will request the Trustees to rectify the breach.
Trustees can self prepare their SMSF investment strategy. Alternatively, Trustees can seek assistance from a professional to ensure it meets the ATO requirements.
If your SMSF investment strategy has not been reviewed and updated recently, it is probably time to do so.
If you would like to arrange an update of your SMSF investment strategy, contact us on 03 9838 3055.
This information is for general information only and does not constitute financial advice or take into account your personal needs, objectives and financial situation. Before making any decisions, we recommend you seek professional advice.
October 2020 ~ Kerrie Salvatore, Concise Super
© Concise Super 2020