Many people choose a self-managed super fund because it grants them flexibility to choose how they invest. However, it’s not the Wild West - there are certain tax obligations you need to fulfill. And it might seem trivial, but by law your SMSF must have an 'investment strategy'. Here's what an SMSF investment strategy means in the eyes of the Australian Tax Office, and how you can manage your goals.
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What is an SMSF investment strategy?
As the 'SM' part implies, you need to self manage your super, and that includes its investments and the likely risks and return. An SMSF investment strategy is your plan for the assets, with performance objectives and how you're planning for life in retirement.
An SMSF investment strategy should set out why and how you’ve chosen your investments, and how these investments are going to meet your retirement goals. With this also comes the responsibility of regularly reviewing this strategy.
How often to review an SMSF investment strategy
It’s important to regularly review your investment strategy at least annually to ensure it's compliant. Any reviews need to be documented in a 'minute', which details how trustees have considered the investment strategy, and whether any changes to the strategy are needed.
What happens in a market correction?
A market correction - whether that's in property or shares - may necessitate a review of your fund's investment strategy. A market correction could make the values of these assets fall, and as such, change the proportion of your SMSF dedicated to each asset. For example, if the sharemarket falls in value, it may make your 'equities' allocation skewiff, and you'll need to review the strategy. Failure to comply with the strategy can make the fund non-compliant, which can attract penalties as detailed further below.
What is included in an SMSF investment strategy?
Many SMSF platform providers have strategy templates for you to use, but according to the ATO, there are five things you must cover:
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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 member of your SMSF.
The ATO also states that the document should be ‘tailored and specific’ to your circumstances rather than merely tick legislative boxes.
Performance and asset allocations
It used to be the case that having a basic outline of targeted returns each year, plus a percentage breakdown of where your investments are going would be sufficient enough for an SMSF investment strategy. For example, 50% Australian shares, 25% fixed income, 25% property, and so on.
However, a recent ATO change to its guidance states: "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 how you plan to invest your super or why you require broad ranges to achieve your investment goals to satisfy the investment strategy requirements."
How to create an SMSF investment strategy
An investment strategy can usually be done by your SMSF provider platform, a financial adviser, or 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 write within context of your age, your appetite for investment risk at that age, and also account for the fact you might want to mitigate risk more as you get older.
What happens if I don’t have or review my SMSF's 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 happen. The ATO requires you as a trustee to review the investment strategy annually.
If you fail to have a compliant or reviewed strategy, you’re at risk of your auditor filing an 'ACR' - auditor contravention report - and penalties of $4,200 could apply for each trustee.
What to do with an SMSF investment strategy
Your investment strategy is audited annually, and there's a chance your auditor may ask for more information or justification in regards to the assets you have allocated in the fund.
While the ATO cannot assist you with your preparation of your SMSF strategy document, it does advise you speak with a financial adviser.
Photo by Ryan Gukert on Unsplash
