SMSF Investment Strategy

SMSF Investment Strategy | Your rules for Managing Your SMSF 

SMSF Investment StrategyThe following is a summary of the requirements for an SMSF Trustee to prepare, give effect to and review an self managed super fund investment strategy. A trustee must formulate an investment strategy and can use the services of a licensed financial adviser to assist them if they so choose or just do themselves. Your SMSF Accountant can also assist you in wading through the requirements but, unless they are licensed to do so, are not able to give specific advice about investments.

What is an Investment Strategy?

Your superannuation investment strategy is not a financial plan, cash flow statement or a statement of advice in relation to specific investments. It is a plan to show HOW your SMSF (Fund) intends to invest the cash and other investments as well as management of the Fund’s assets and liabilities to achieve the Fund’s investment objectives and retirement goals of the members including asset allocation levels, investment ranges into different assets and a formalised plan to invest your super. 

This SMSF strategy should be in writing as the SMSF auditor will be reviewing it to ensure that is meets the requirements under the act. Keep in mind the auditors role is not to pass judgement on how you’ve chosen to invest but rather than a written plan exists your conduct thereafter reflect your articulated investment approach. 

The job is ongoing and requires the trustee to implement, review and update the investment strategy annually at a minimum or alternatively more frequently when circumstances change.

For further details about Investment Strategies please refer to the ATO website.

Tip – Depending on your personal circumstances the general rule is to avoid investing into a single asset for the long term as it is a red flag to the ATO and auditors. Of particular concern are lumpy assets like property which cannot be easily liquidated and is at a higher risk of not being able to meet the cash flow requirements of members when they hit pension phase. This does not mean that setting up an SMSF to only buy property is illegal but you need to consider cashflow considerations when making your investment decisions especially if the members are getting close to retirement age.

For example, the trustees of an SMSF must be able to pay out a lump sum or a pension payment when required to the members of the SMSF. In the case of a single property the rent may not provide enough liquidity to meet the expected cash flow requirements. This is a particular problem in a hot property market which can force up the value of a property which in turn forces up the required pension payment. Whilst it is possible for a Fund to hold a single asset there is additional audit and ATO scrutiny. The investment strategy plays a key role to evidence why a single asset or one asset class can meet the Trustee’s objectives.

Why do I need to document what my SMSF Can Invest in?

Superannuation law known as the SIS Act requires a trustee to prepare and implement an investment strategy which is legally binding on the trustee. Penalties can apply to each Trustee when a Fund does not have an investment strategy in place, or it is deemed inadequate. 

The investment strategy can be a protective mechanism for a trustee and a member and the strategy should be reviewed annually. The strategy needs to discuss the allocation of the fund’s assets and provide an articulated investment approach towards achieving your investment goals.  

Example – Imagine a scenario where Dad is the driver behind the Fund and Mum merely signs off on the paperwork. Mum and Dad split up and the breakup is bitter. Mum gets a good lawyer and decides to get her fair share of the Fund. Mum wants her money in a nice safe term deposit. She sues Dad as her lawyer discovered that Dad invested the Fund’s money into Cryptocurrency which resulted in huge short term losses. The trustee formulated the investment strategy and documented it before investing into Cryptocurrency. The strategy did not indicate why the Trustee thought that a conservative investor would benefit from investing in those assets or how they would manage investment risk. Typical of a lot of Mum and Dad Funds the investment strategy was never dusted off after it was formulated. Dad is left wide open to litigation.

As member and trustee of a Self-Managed Super Fund you wear two hats. Trustee decisions are based on what is known as the “prudent person test.” The Trustee must invest the Fund’s assets and manage the Fund as a prudent person would expect to act considering the needs of the members, preservation of the Fund’s assets and the amount and regularity of income (including the tax consequences).

Reviewing and Updating Your SMSF Investment Strategy

The Trustee is required to review the investment strategy for your SMSF at least annually and update it as the plan changes. It is a live document which should articulate how you plan to manage your fund and achieve your retirement goals.  The investment strategy is not required to include the specific investments but should include the broad investment ranges in various asset classes, percentage or dollar allocation that you are planning to invest in those assets and also include the reasons why the Trustee believes investing into risky or unusual investments such as pink diamonds, cryptocurrency, paintings or a single asset can meet the objectives of the strategy. This needs to be in writing and be tailored to your specific circumstances discussing the extent to which the investments are diverse or involve more single asset risk.

Trigger points to update the Fund’s investment strategy include significant changes to the investment market, new or departing members and when a member starts receiving a pension or major restructuring of member benefits ie on the death of an SMSF member.

How long do I need to keep the Fund’s Investment Strategy and updates?

The records must be kept for 10 years from the date of the document. Any updates or change to the strategy is required to be kept for 10 years from the date the change was documented. If the members decide to have separate investment strategies

Investment Objectives, Risk, Diversification, Liquidity and Insurance

An investment strategy should reflect the following considerations:

Objectives – Decide what the objective of the Fund should be and how to achieve it. An example could be as simple as identifying the expected return over a certain period of time. Document it and compare it to the actual performance of the Fund’s investments. Percentages, showing target allocation of various investment classes (ie cash, shares, property), not required. However, it is useful to use as a tool to measure the actual allocation to ensure the strategy is on target.

Risk – Does the return on the investment merit the risk underlying the investment? Document why and how. Understand what the risk is and what the member’s risk profile is. Is the risk of the investment compatible with the investment strategy?

Diversification – is the spreading of risk by investing in a range of different assets, different geographic regions and various industries. Simply put it is not having all your eggs in the same basket. Markets can be volatile. The share market, property market and cash market are three of the major asset classes and, whilst there is no guarantee, a drop in one market can often be offset by a positive performance in another asset class.

As per the tip above a Fund can have a single asset or single class of asset. However, the investment strategy must explain why and how it meets the Fund’s objective including the extent the trustee has considered cash flow risks.

Liquidity – The Trustee must consider the liquidity of the fund to manage operating expenses, investments and loan repayments (if applicable under a limited recourse borrowing arrangement or Bare Trust). Changes in Government legislation, establishing pensions for members, payment of member benefits when a member dies are all circumstances which can affect cashflow and should be considered.

Consider Insurance – As part of an investment strategy SMSF insurance must be considered to decide if the fund it should hold insurance policies for the members. There is no requirement that the Trustee must do this. The Trustee only needs to consider it and document what was involved in making their eventual decision.

Document all of the Trustee’s decisions in the investment strategy and explain why.

Should I use an Investment Strategy Template?

It depends. There are many variations available However, the principles discussed in this paper and the ATO website (refer to link provided earlier) provide guidelines to what the auditor and the ATO require in an investment strategy. During the SMSF set up, and strategy set up process a template is generally used as a foundation to work from for new trustees. This template can be a good place to start but should not be blindly adopted and an investment strategy should be reviewed by your adviser prior to being put into effect to ensure it meets the ATO requirements.

What is the ATO looking for? Annual Investment Review

The ATO wants transparency and a way of checking what the trustee intends to do vs what is actually happening in the fund. The best evidence is a written investment strategy showing the Trustee’s plan to manage the Fund’s assets and liabilities. The Trustee should be able to demonstrate, if queried, how the plan was formulated and why it meets the objectives of the Fund.

Key Takeaways for your Self-Managed Superannuation Fund

  • Investment strategies for SMSF trustees are about protection as well as documenting how you have chosen to invest your retirement
  • An Investment Strategy is a formal written plan for making investment decisions
  • A trustee must be able to show how they have given effect to an investment strategy, eg. show how your activities support and reflect your articulated strategy.
  • The percentage investment ranges actually invested in during the year should match to the investment strategy
  • SMSF investment strategy asset allocation is not determined or dictated by the ATO but must be documented by the trustee
  • The investments as a whole must meet the class of investments allowed under the strategy.
  • As part of the investment strategy requirements insurance must be considered by the trustees although they are not required to be purchased. 
  • Trustees may seek financial advice from a licensed financial planner who can also help with investment options at the SMSF’s discretion
  • Review the strategy at least annually to ensure it has been followed correctly and is still relevant to the trustees.
  • Document decisions and ensure they meet the SMSF investment strategy requirements
  • Consideration of diversification, Cashflow and Risk Management are key to self managed super fund strategies
  • Keep your records for 10 years including proof you have reviewed the strategy regularly

Do you need help with your SMSF Invertment Strategy?

Give us a call on 1300 392 544 or get in touch online.

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If you’re interested in learning more about our how we can help with your SMSF Investment Strategy please reach out for a confidential quote. Simply submit your details and one of our friendly team will be in touch as soon as possible.

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Do you want to learn more about our SMSF Investment Strategy?

Give us a call on 1300 392 544 or fill in the form above

Contact Us

If you’re interested in learning more about how we can help with your SMSF Investment Strategy please reach out for a confidential quote. Simply submit your details and one of our friendly team will be in touch as soon as possible.

Contact Us