Putting It In Writing: How to ensure SMSF investment strategy compliance

Here is a summary of the requirements for having, enforcing and reviewing an SMSF investment strategy in plain language.

What is the operating standard for an SMSF investment strategy?

The investment strategy must:
• be in writing, signed by members or trustees and kept in hard copy for 10 years;
• be reviewed regularly;
• be put into action;
• address risks,
• address liquidity, in case a member retires or dies and a benefit needs to be paid out,
• outline the likely return on investment, including objectives and cash flow;
• outline the composition of the investments to ensure diverse holdings (how much in property, cash, shares, collectibles etc);
• describe the proposed timing and method of sale of assets;
• include a decision about whether or not to hold insurance such as life insurance.

Note: for further details, review section 31 (1) of the SISR 1994, and regulation 4.09.

Have an SMSF investment strategy in writing

It sounds simple really, but you’d be surprised to hear that every now and then we see an SMSF without an investment strategy clearly articulated.

Putting the SMSF investment strategy in writing helps trustees to be clear about their goals, and encourages them to review the strategy each year. Perhaps a property is costing too much in up-keep to be profitable, or a parcel of shares is dropping in value. If an element of the strategy isn’t working, then they can review their position and decide if they should change their investment mix. Without a clear written plan, and their expected returns in writing, it makes it harder to see their progress year by year.

Also, putting the SMSF investment strategy in writing means that it’s clear to all members what the agreed goals are. No trustee can have the wool pulled over their eyes because they are required to read, understand and sign it.

Investment objectives, likely return, diversity and liquidity

The objective for an SMSF is to provide savings and growth for a comfortable retirement, so a superannuation fund’s investment strategy should describe how that will be achieved.

Objectives and returns
Elements such as how much money will be invested by each member, what kind of assets will be in the mix, and the expected value of the investments at retirement age. The strategy should also document how assets will be sold. The cash flow of the fund should also be planned to ensure the fund can pay for insurance premiums, rental property upkeep and council rates, yearly tax and accounting fees, and more.

Liquidity
A fund should be able to turn some assets into cash at short notice if required. If a fund has most of its investments in property and a member dies or decides to retire, it can take a long time to turn those investments into cash to pay benefits. One way to approach this is to have a certain percentage of liquid assets in the fund, to allow flexibility.

Diversification
Holding a lot of the same type of asset can put a fund at risk. If all assets are in shares, or a lot of shares in one industry, and another GFC type event happens, the fund’s value can plummet in a matter of weeks. A lot of pre-retirees got stung in 2008 and they had to keep working a lot longer than they planned. Diverse investments can help to mitigate this risk.

Risks and Insurance

The SMSF investment strategy must document all possible risks and a plan to minimise and deal with risks. The risks don’t have to be about financial risks like speculative investments;

a trustee whose health is declining rapidly can be considered a risk to the fund because they might need a medical payout or retire early.

Best practice is for property and collectibles should be insured at their market value, and life insurance and TPD insurance should be included for members. Adequate insurance means that the fund’s value is protected.

Action and review

SMSF investment strategies must be put into action. The contents of the fund should match the plan, and any changes should be made at the agreed time. Actions made to buy or sell assets must be documented in the minutes.

We suggest a minimum review period of once per year. It’s a good idea to review quarterly, with progress documented in the minutes. That way trustees keep track of the value and growth of their fund. As the members age or their situation changes, the strategy should be reviewed. They can review and decide to leave the strategy as it is, and document that they decided to make no changes.

With careful planning and security of their investments, your clients will be able to enjoy a comfortable retirement.

Need help?

If you have concerns about your client’s investment strategy before the audit, give TriSuper Auditors a call on 1300 TRISUP. Let’s get your client’s records in order before the audit and before the ATO takes a look.