The investment strategy is one of the most consistently misunderstood documents in an SMSF – and one of the most scrutinised by auditors.
Here’s what you actually need to know.
If you’ve been around SMSFs for a while, you’ve probably seen the investment strategy that gets updated once every few years, says something vague about “a diversified mix of assets,” and gets signed off without much thought.
Maybe the trustees have been investing the same way for a decade. Maybe nothing dramatic has changed.
So why does the auditor keep flagging it?
The short answer is that a compliant investment strategy is a legal requirement – not a formality – and the ATO has been increasingly vocal about what it expects.
Here’s what your clients actually need to have in place, and where accounting firms can add real value in getting it right.
What the law actually requires
Under the SIS Act, every SMSF trustee must formulate, review regularly, and give effect to a written investment strategy.
That last part – “give effect to” – is where things often fall apart.
It’s not enough to have a document. The fund’s actual investments need to reflect what the strategy says.
The strategy must consider a specific set of factors:
- Risk and likely return – taking into account the fund’s objectives and expected cash flow requirements. A strategy that ignores the fact that the primary member is 64 and approaching pension phase is not doing its job.
- Diversification – the strategy must consider the composition of investments as a whole, including the risks of inadequate diversification. A fund that holds 100% in a single property needs to explicitly address why that’s appropriate for its circumstances.
- Liquidity – can the fund meet its liabilities as they fall due? This becomes especially important for funds moving into pension phase, or where a member might need to make a lump sum withdrawal.
- Life insurance – trustees must consider whether to hold insurance for each member. They don’t have to take out a policy, but they do have to show they’ve considered it. A generic line saying “insurance has been considered” barely cuts it these days.
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The ATO’s position: The ATO has made clear it expects investment strategies to be specific to the fund’s circumstances – not generic documents that could apply to any SMSF. A one-size-fits-all template with no reference to the members’ ages, risk profile, or actual asset mix is unlikely to satisfy a thorough auditor. |
Why “We haven’t changed anything” isn’t good enough
This is the conversation that comes up most often.
A client has held the same mix of shares and cash for five years, the strategy was written in 2019, and they genuinely can’t see why it needs updating.
The issue isn’t whether the investments have changed – it’s whether the strategy still reflects the fund’s current circumstances.
Those circumstances change even when the portfolio doesn’t.
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- A member who was 55 in 2019 is now approaching pension phase.
- Market conditions have shifted.
- The fund’s balance has grown.
- A new member might have joined.
Any of these things can make a strategy that was once appropriate now inadequate – and an auditor who asks for an updated strategy isn’t being pedantic, they’re doing their job.
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A practical suggestion: Build an annual strategy review into your SMSF client workflow – ideally before the year end, not after the audit request lands. A short conversation with the trustees about whether their objectives or circumstances have changed takes fifteen minutes and produces a document that’s genuinely defensible. |
The concentrated portfolio problem
One of the trickiest situations you’ll encounter is the fund that holds a single large asset – most commonly a commercial property or a significant parcel of shares in a related company.
There’s nothing automatically wrong with this, but the investment strategy needs to do more than acknowledge it exists.
It needs to explain why that concentration is appropriate for the fund’s specific circumstances – the members’ other assets, their income, their timeline to retirement, and their capacity to absorb a fall in value.
A strategy that simply lists the asset without addressing the concentration risk is not going to satisfy a quality auditor, and increasingly, it won’t satisfy the ATO either.
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Watch out for this one: Some trustees interpret “give effect to the strategy” as meaning they can write a strategy to match whatever they’ve already decided to invest in. That’s backwards. The strategy should drive the investments, not the other way around. If a fund has already acquired an asset that doesn’t fit the strategy, that’s a contravention – not something that can be fixed by updating the strategy after the fact. |
What a good investment strategy actually looks like
A compliant investment strategy doesn’t have to be long, but it does have to be specific. At a minimum, it should:
- Identify the fund’s objectives – what are the trustees actually trying to achieve, and over what timeframe?
- Set out target asset allocation ranges – not just broad categories, but percentages that reflect how the fund is actually being managed. “0–100% in equities” is not an asset allocation strategy.
- Address the circumstances of each member – their age, risk tolerance, and proximity to retirement phase all need to be factored in.
- Deal with liquidity explicitly – particularly if the fund holds illiquid assets like property or unlisted investments.
- Document the insurance consideration for each member – with enough detail to show it was actually considered, not just mentioned.
- Be signed and dated by the trustees – and reviewed at least annually, with the review documented.
Where accounting firms can add real value
You don’t need to be a financial adviser to help clients get the investment strategy right. You can’t provide personal financial product advice – that’s squarely in the adviser’s territory – but you absolutely can help trustees understand
- what the strategy needs to address,
- flag when an existing strategy looks inadequate,
- and prompt them to get it reviewed before the audit.
In practice, a lot of SMSF clients don’t have an ongoing relationship with a financial adviser. They set up the fund years ago, maybe got some initial advice, and have been running it themselves ever since.
For those clients in particular, the accounting firm is often the only professional touchpoint they have – which means you’re well placed to spot when the strategy is due for attention and refer them on if the investments themselves need a rethink.
The bottom line
The investment strategy is one of the areas where audit findings are most predictable – and most preventable.
A fund with a generic, outdated, or one-line strategy is going to get flagged.
- A fund with a current, specific, and properly documented strategy is going to sail through.
It’s not glamorous work, but helping your clients get this right every year is one of the most practical ways an accounting firm can reduce audit friction and keep the regulator happy.
And frankly, given how closely the ATO is watching SMSF compliance, it’s worth treating the investment strategy as a priority – not an afterthought.
This article is for general information purposes and does not constitute legal or financial advice. Accounting firms should not provide personal financial product advice. Refer clients to a licensed financial adviser for investment recommendations specific to their circumstances.
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