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Your clients’ SMSF investment strategy: keeping lawyers at bay

In the past, many accountants haven’t put enough emphasis on the SMSF investment strategy. After all, if the client is a “Mum and Dad” fund, and they make a bad investment decision for their superannuation, that’s their own problem.

But what about when there are other trustees involved, such as grown-up kids in the family fund, or a business partnership fund? Those stakeholders deserve to have their superannuation and their interests protected.

Not surprisingly, an appropriate investment strategy is one of the best ways to ensure that the fund provides for a comfortable retirement.

Recent court cases have revealed that having an appropriate – and most importantly, compliant – investment strategy has become the focus of SMSF lawyers. In their eyes, inappropriate SMSF investment strategies have led to devastating financial losses for trustees. And as a result, accountants and lawyers have been found liable for those losses, and been forced to pay large settlements.

Good SMSF auditors now expect to scrutinise your clients’ investment strategies as part of the annual audit; this article is about why it’s worth the effort.

Recap: SIS Act, Section 52, paragraphs 6 and 7

The SIS Act (1993) outlines various duties and covenants for superannuation funds. In plain language, trustees’ responsibilities include:

  • Acting honestly and in the best interest of members
  • Taking care and diligence in all activities, in the same way that an arms’ length trustee would take care
  • Paragraph 6 – trustees are required to formulate, review and give effect to an investment strategy. The investment strategy must consider the risks in making, holding and realizing returns. Scrutinise the composition and liquidity of investments and whether investments can be valued with accuracy
  • Paragraph 7 – trustees must consider purchasing life insurance as part of their SMSF

So, what does this mean for your clients?

The Act is in place to provide assurance for members of the fund that trustees are working in their best interests.

With SMSFs, the presumption is that there are no more than 4 members, and that all members will jointly be involved in the decision-making process.

This means that one trustee is not acting on their own to make financial decisions. It also means that all members must consider the best interests of the other members, and their beneficiaries in the event of a member’s death. (See legislation link for full details)

Auditors now expect more from accountants and trustees

There are situations where auditors and accountants can get into trouble for not ensuring trustees have appropriate plans in place.

We see this risk in a few examples:

  • Issues arise when fraud occurs, either by an accountant or one of the trustees
  • A third party is affected by trustees not having an effective investment strategy
  • Third parties or members say they were excluded from decision making
  • A third party is affected by trustees not having appropriate life insurance
  • The accountant or auditor not picking up on the lack of an effective strategy or insurance

Here’s how some of these issues could play out for trustees, and when lawyers might get involved.

Example: Speculative investments

An SMSF fund invests 100% of its assets in a speculative investment, such as Bitcoin. Down the track there’s a divorce, and the spouse claims that the SMSF had a responsibility to invest reasonably, and that a reasonable fund would not invest 100% in Bitcoin. The spouse sues the accountant and/or the auditor for not ensuring that the SMSF investment strategy was reasonable.

Example: Life insurance

Two business partners set up a self managed super fund to jointly buy a property to run their business. They’re both in their late 30s, married with kids. They could get a life insurance policy paying out $1 million in the event of their death, for about $1000 a year, which is very reasonable. One partner dies and the spouse approaches the fund to ask for a life insurance payout to pay off their mortgage and keep the family home. The spouse asks why they didn’t have appropriate life insurance, then sues the other partner, claiming they had a responsibility to hold an appropriate level of life insurance in the fund.

It’s not the auditor’s role to give financial advice

As part of the annual audit, good SMSF auditors are taking the time to check that:

Basically, does an investment strategy exist, and does it comply with the Act?

And to ask: “Would a reasonable trustee make this investment?”

But it’s not the auditor’s role to give financial advice, or to say whether or not the investment strategy is an appropriate choice for the members.

The auditor’s job is to raise a red flag when, in their opinion, an SMSF investment strategy:

  • is not presented as part of the audit
  • does not comply with the SIS Act
  • appears speculative or risky
  • or if investments don’t appear to be at arm’s length

I strongly recommend that all accountants send their trustees to an independent financial planner every 2 years to review the SMSF investment strategy, and suggest adjustments to suit the client’s situation and goals.

This is one of the best ways you can get an independent opinion, and to say that you’ve done what you can to ensure your clients have an appropriate SMSF 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.

Contact TriSuper Auditors on 1300 TRISUP or visit our website for further information.

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