SMSF Investment Strategy Template

ATO Investment Strategy requirements

The ATO requires that SMSF’s have a documented investment strategy that considers:

  • investing in a way to maximise member returns taking into account the risk associated with the investment
  • diversification and the benefits of investing across a number of asset classes (for example, shares, property and fixed deposit) in a long-term investment strategy
  • the ability of your fund to pay benefits as members retire and pay other costs incurred by your fund
  • the needs of members (for example, age, income level, employment pattern and retirement needs).

Furthermore, from 1 July 2012 it became a legislative requirement that Trustees “review regularly” their investment strategy. The ATO have stated these reviews “should occur on a regular basis and could be evidenced by documenting decisions made in the minutes of meetings held during the income year”. Although the regulations do not specify what constitutes “regular” anything less than an annual review would be unlikely to satisfy this requirement.

In addition, the 2012 legislaton also requires Trustees to consider “whether the trustees of the fund should hold a contract of insurance that provides insurance cover for one or more members of the fund.” This does not mean the fund has to have insurance in place for members but it does mean Trustees need to be able to demonstrate their consideration of the requirement for insurance. Whilst the legislation does not specify how this is done most commentators recommend including a comment in either the Investment Strategy or the fund’s annual minutes.

In September 2019 the ATO began an email campaign targeting Trustees of funds where more than 90% of the fund’s assets were held in property and the fund reported having a Limited Recourse Loan. The ATO highlighted that Trustees are legally required to consider diversification, risk, return and liquidity and that failure to be able to demonstrate this could represent a breach of SIS rules potentially resulting in a penalty of up to $4,200. This type of ATO campaign usually precedes information requests to selected Trustees to confirm the legislatiave requirements have been satisfied.

It is important to note a couple of points in relation to the ATO “diversification” campaign:

  • A fund is not necessarily required to be diversified. It may be reasonable for a fund to have a 100% cash allocation (eg a fund in pension phase with low risk tolerance) or for a fund to hold more than 90% as shares (noting the share portfolio may have many different shareholdings)
  • Where a fund is not diversified some statement explaining the rationale for the lack of diversification needs to be in place. Examples I have seen include statements such as:
    • “we are conservative investors who are seeking maximum capital protection”, or
    • “we are aggressive young investors seeking maximum capital growth over the next 20 years and therefore have decided to invest the majority of our assets in listed shares”; or
    • “we are familiar with property investment and believe a geared property investment represents the best combination of risk and return given that we have many years until retirement and have secure stable jobs with ongoing SGC contributions”
  • The ATO has no right to dictate what is an appropriate level of diversification or what asset classes funds should invest in. Similarly most Accountants are not licenced financial advisors and therefore cannot make any recommendation as to asset allocation decisions or specific asset recommendations. An Accountant can however outline the benefits of diversification and the advantages and disadvantages of specific asset classes

SMSF Investment Strategies in practice

Many of the funds we see have investment strategies which are very general and/or unchanged from the original strategy when the SMSF was established. They have not been updated to reflect market volatility over recent years or the changed financial circumstances of the SMSF members themselves. Talking to the Trustees however,  it is clear that they have amended their strategies and asset allocations in response to changing circumstances. In such instances it is prudent good practice to revisit the Investment Strategy and document the current SMSF Investment strategy, addressing in particular, the ATO requirements outlined above.

In many instances, one SMSF member tends to make most of the Investment decisions. It is often illuminating for all SMSF members to consider the SMSF Investment Strategy and ask themselves questions such as:

  • Are we happy with such a strong exposure to equities?
  • Are we happy with a such a high proportion of assets invested in direct Property?
  • Are we sufficiently diversified?
  • Will our current SMSF Investment Strategy provide us sufficient liquidity when we enter pension phase?
  • Will the property be able to fund our pension drawdowns?
  • Do we have a cash buffer to fund our pensions in the event of a market downturn so that we are not forced to sell shares at the bottom of the market?

Accordingly, I believe it is a useful discipline for all SMSF Trustees to consider, if only briefly, on an annual basis (say when the SMSF minutes are signed), the SMSFs current investment strategy to ensure it is consistent with the funds’ investments, member wishes and requirements.

Free SMSF Investment Strategy Template

To assist those SMSF Trustees who need to update their SMSF Investment Strategy we have attached a downloadable SMSF Investment Template. This should provide a useful starting point for documenting, and/or updating your investment strategy (click on red highlighted text below). Please follow the links below for either a PDF or Word document versions of the document

SMSF Investment strategy template (Word Document)

SMSF Investment strategy template 2019 (PDF)

Disclaimers: This is a template only and needs to be tailored for Trusteesindividual circumstances. This template does not take into account the circumstances of individual trustees and does not represent any form of financial advice. Please obtain advice from a qualified financial advisor if you require assistance in regard to asset allocation and/or product selection for your SMSF.

SMSF Investment Strategy & avoiding litigation

The importance of maintaining an up to date SMSF Investment Strategy was further highlighted by the article below which noted that Trustees could be sued by other SMSF members if the SMSF’s Investment Strategy was not sufficiently diversified and resulted in a less than optimal investment outcomes.

Undiversified SMSFs face being sued

Think this couldn’t happen – you only have to look at the Rinehart family dispute where the adult children are attempting to take control of a Trust from their mother (admittedly involving billions of dollars) or look at bitter family breakdowns to realise the potential for litigation in this area.

Accordingly, all trustees should sign off the SMSF Investment Strategy confirming their agreement with the stated strategy. If some of the Trustee’s wish to pursue a different strategy, you may want to  consider segregating SMSF assets into different pools with different Investment Strategies applied to each of the segregated asset pools. It will involve an increase in SMSF Administration costs, but may save potential litigation later and will ensure all Trustees achieve the investment control they were seeking.

About DIYSuperAudit

DIYSuperAudit is a Chartered Accounting practice that specialises in the audit of SMSF’s. We work with small to medium sized accounting firms, financial advisors and self directed trustees to deliver quality SMSF audits in a professional and highly efficient manner. We have designed our systems to maximise the efficiency of our SMSF audits and to streamline our interactions with our clients.

We provide no other accounting or financial advisory services and have no relationships with financial institutions. All work is undertaken in Australia by Australian qualified professionals.

Our fees are based on the complexity and extent of work required to audit each SMSF, however; to provide upfront pricing certainty for our clients we have a tiered fixed pricing structure for SMSF audits with funds defined as Simple ($440 + GST) , Standard ($545 + GST) and Sophisticated ($750+GST). For newly formed SMSFs our first year audit fee is $365 + GST.

If you are interested is seeing further details on our pricing model and characteristics of funds in each pricing tier please click on the button below.

SMSF Audit cost

DIYSuperAudit : Self Managed Super Audit Specialists : SMSF Audits : TOLL FREE 1300 733 159