Many Australians - at last count more than 1.1 million - have chosen to be members of a self-managed super fund (SMSF). One of the big drawcards of an SMSF is that members feel they have more input and flexibility on how their funds are invested.
But it’s not the Wild West - there are certain tax obligations SMSF funds need to meet and, by law, every SMSF is required to have an official investment strategy. Far from being a box-ticking exercise, SMSF investment strategies must meet strict benchmarks.
Here’s what an SMSF investment strategy means in the eyes of the Australian Taxation Office, and how you can devise one to manage your investment goals.
What is an SMSF investment strategy?
As the ‘SM’ prefix implies, when you ‘self-manage’ your super, you get to choose what you invest in and assess the likely risks and returns. But all SMSF investing must be part of a wider plan laid out in your fund’s SMSF investment strategy. This is a legally required document that outlines the way forward for your SMSF’s assets, their performance objectives, and exactly how the fund plans to cater for the retirements of all fund members.
An SMSF investment strategy also has to set out why and how a fund has chosen its investments, and address exactly how these investments are going to meet members' retirement goals. Inherent in the process is also the responsibility of regularly reviewing the strategy.
How often to review an SMSF investment strategy
It’s important to regularly review your SMSF investment strategy - at least annually - or any time personal or financial circumstances change, or a significant event occurs.
This includes after any ‘market correction’ where there is a sizeable change in the value of any asset classes, such as shares or property. Such events can also disrupt the percentage allocation of SMSF assets (see more on this below), necessitating a review of the strategy.
Any reviews need to be formally documented in a ‘minute’, which details how trustees have considered the investment strategy and whether any changes to the strategy are needed.
What needs to be included in an SMSF investment strategy?
Many SMSF platform providers have strategy templates you can use but according to the ATO, there are five things that must be covered:
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Risks involved in making, holding and realising, and the likely return from your fund’s investments regarding its objectives and cash flow requirements
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Composition of your fund’s investments including the extent to which they are diverse (such as investing in a range of assets and asset classes) and the risks of inadequate diversification
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Liquidity of the fund’s assets (how easily they can be converted to cash to meet fund expenses such as the cost of managing the fund and income tax expenses)
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Fund’s ability to pay benefits (such as when members retire and require a lump sum payment or regular pension payments) and other costs it incurs
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Whether to hold insurance cover (such as life, permanent or temporary incapacity insurance) for each SMSF member.
The ATO also states the investment strategy document should be ‘tailored and specific’ to your circumstances rather than merely tick legislative boxes.
SMSF performance and asset allocations
In the past, having a basic outline of targeted returns each year, plus a percentage breakdown of where your investments are going would be sufficient for an SMSF investment strategy. For example, 50% Australian shares, 25% fixed income, 25% property, and so on.
However, the ATO has tightened up its guidance in recent years: “It is not a valid approach to merely specify investment ranges of 0 to 100% for each class of investment. You also need to articulate:
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how you plan to invest your super, or
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why you require broad ranges to achieve your investment strategy requirements.”
How to create an SMSF investment strategy
An investment strategy can usually be done through an SMSF provider platform, a specialist financial adviser, or you can do it yourself - if you are willing and able. It can be as simple as a Word document addressing the five points above, your asset allocations, and reasons for those percentage figures.
You must also devise a strategy within the context of your age, your appetite for investment risk at that age, and also account for the fact you might want to reduce risks as you get older.
What happens if I don’t have an SMSF investment strategy?
Navigating the SMSF compliance and tax minefield can be a massive headache for a new trustee or member. Long story short, if your fund does not have an investment strategy or it’s not sufficient, it’s at risk of being ‘non-compliant’, which is a big deal in the eyes of the ATO.
If your strategy fails to adequately address the five points mentioned earlier, you can fix this by attaching a signed and dated addendum to the strategy, which can then be shown to your SMSF auditor.
Certain events may necessitate a review, such as a market correction, when a new member joins or leaves, when a member starts receiving a pension, or if any significant life events occur. The ATO requires you, as a trustee, to review the investment strategy annually.
What to do with your SMSF investment strategy
Ensuring your SMSF investment strategy is well-structured, regularly updated, and readily available is a good first step.
The document is audited annually, and there’s a chance your auditor may ask for more information or justification on the assets you have allocated in the fund.
While the ATO can’t assist with the preparation of your SMSF strategy document, it advises anyone needing guidance to engage the services of a specialist SMSF or licensed financial advisor.
It also warns people to take care with using standard investment strategy templates as some may not satisfy superannuation rules or be appropriately tailored to reflect a fund’s unique circumstances.
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First published on August 2021
Photo by Ryan Gukert on Unsplash
Denise Raward
Aaron Bell
