Date posted: 15/05/2020

ATO SMSF investment strategy paper

Important to understand the background

In brief

  • Trustees always had obligation to invest trust monies prudently
  • Statutory investment strategy requirement has been with us for over 25 years
  • Became an operating standard for SMSFs in 2012

In February this year the ATO released information about SMSF investment strategies.

This publication caused almost as much controversy as the small number of letters the ATO sent to SMSF trustees that had a heavy concentration in a single asset in 2019.

The issue of super fund investment strategies has been controversial for over 25 years.  In this article we will consider the history of this requirement and then look deeper into what the ATO have actually said in this latest release.

We will conclude by looking at how unlicensed accountants could help their clients successfully draft an investment strategy document.

Duty to invest trust fund prudently

Trustees can only invest according to the powers and any directions given to them by their fund's trust deed.

If a trustee invests in a way not authorised by their deed they would likely be in breach of trust.

It would be fair to say that most modern SMSF trust deeds give trustees wide powers to invest their super fund's money.

Nevertheless this does not give trustees a completely free hand.

To begin with trust monies must be invested.  In 1919, the Court of Appeal of England and Wales determined that "investment" meant "to apply money in the purchase of some property from which profit or interest is expected and which property is purchased in order to be held for the sake of the income which it will yield".

It goes without saying that super funds exist to provide retirement and/or death benefits which may be paid in lump sum or pension form.  More specifically super funds must satisfy the legislative sole purpose test – that is, provide at least one core purpose – such as retirement benefits – and, if desired, potentially ancillary purposes.

Over time the courts developed the concept of the "prudent man test" which in this age is now often referred to the "prudent person test".  This test was defined in another court case before the Court of Appeal of England and Wales from 1886 "a trustee ought to conduct the business of the trust in the same manner that an ordinary prudent man of business would conduct his own… the level of skill to be exercised by a trustee is that which a person of ordinary prudence would exercise in dealing with the property of another person for whom he or she felt morally bound to provide." (our emphasis)

In April 1992, the Australian Law Reform Commission (ALRC) published a report on superannuation law reform (Report No. 59).  In relation to the prudence test it said:

"This is not only a high standard, it is an objective standard.  Acting honestly, while a fundamental requirement, is not sufficient."

Even though a trust deed may permit a wide range of potential investments including highly speculative ones, a trustee is still under a duty to act prudently and in good faith.  It is still possible for a trustee to invest the funds inappropriately even though the investments were permitted.

The key points are that a trustee can make mistakes but at all times it must objectively be the case that a trustee has invested money prudently.

The SMSF unique structure

As we all know there must be a very close relationship between SMSF trustees and their members (in the vast majority of cases they are the same people).  There will only be a few SMSFs that do not have beneficiaries apart from these trustees/members.  For example in many cases non-trustee beneficiaries might be entitled to receive a death benefit.

The vast majority of SMSFs have two members and in nearly all cases these members are spouses.

Disputes between SMSF trustees/members are quite common especially because of relationship breakdowns.

It seems perfectly logical to argue that a SMSF trustee can invest their money according to the whims and wishes of members because after all it is their money.  As we shall see there is a regulatory process SMSF trustees can use to effectively make this preference happen.  But the question then become have the trustees acted prudently – that is, "which a person of ordinary prudence would exercise in dealing with the property of another person for whom he or she felt morally bound to provide"?

Super law investment strategy requirement has been with us for over 25 years

The Australian Law Reform Commission in its report on superannuation law (see above) gave diversification of a fund's investments some attention:

It has been suggested that, given the importance of superannuation, it is an appropriate objective of its prudential supervision to try to reduce the level of investment risk by specifying, in general terms, the degree of diversification of investment portfolios held by superannuation schemes.  In general, a superannuation scheme that holds a diversified portfolio will carry less overall risk than a scheme that restricts its investments to a few classes of assets. While there are indications that trust law is now recognising the importance of the issue of risk management when assessing the actions of trustees, the courts have traditionally adopted a 'line-by-line' approach and examined the risk and return for each investment in the scheme, without reference to the risk and return of the other investments made by the trustee. This line-by-line approach is inconsistent with modern portfolio theory." … a fundamental tenet of trust law is that a trustee must act in a prudent fashion when making investments on behalf of superannuation scheme members. Generating an appropriate rate of return is, however, a vitally important objective of a superannuation trust. If a trustee is too conservative regarding investment decisions, the scheme will not earn a high enough rate of return to provide its members with a useful supplement to their publicly provided pension. To select assets broadly in the market, therefore, can be regarded as a prudent strategy, for it reduces the portfolio risk without significantly reducing the rate of return. Thus a strategy of diversification, being a prudent but not overly conservative policy, is appropriate in the superannuation context. To the extent that the 'line-by-line' approach taken by the courts ignores modem portfolio theory, the overall risk of the portfolio may be increased without a corresponding increase in return.

Elsewhere in this report the ALRC noted that:

The principal function of a superannuation scheme is the investment of contributions to provide retirement income. Other trusts may or may not have such a long term objective. Because of the importance of the investment function, superannuation schemes are often granted wide powers of investment by their deed or other constituting document, to enable them to establish and manage a broad portfolio of investments. Several authors have observed that the court's approach when reviewing the investment decisions of superannuation schemes has been much more restrictive. A more appropriate approach is that taken in Nestle v National Westminster Bank Plc [a 1992 Court of Appeal of England and Wales decision] where it was observed that the standard of care to be observed by trustees set out by In Re Whitely is  capable of adaption to current economic conditions and contemporary understanding of markets and investments … Modern trustees acting within their investment powers are entitled to be judged by the standards of current portfolio theory, which emphasises the risk level of the entire portfolio rather than the risk attaching to each investment taken in isolation.

This is not to say that losses on investments made in breach of trust should now be able to be set off against gains in respect of the portfolio, only that an investment which in isolation appears to be risky and therefore may be in breach of trust may be justified when considered in conjunction with other investments.  The Review endorses this approach and recommends that responsible entities be required by the new law to take such an approach in their management of a superannuation scheme's investments. The inclusion of such a duty in the new law would also clarify the approach to be taken when disputing in court a responsible entity's investment decisions.

The government picked up these ALRC thoughts when it formerly adopted the SIS Act as government policy in October 1992 in a document titled "Strengthening Super Security" which said that,

The Government considers that one of the essential duties of trustees is to invest in a manner that seeks to maximise the rate of return on members' entitlements commensurate with a prudential approach to risk.  The Government believes that this can best be achieved by encouraging trustees to adopt a balanced portfolio approach to the investment of members' funds.  This means that trustees should generally invest fund assets across the full range of investment opportunities with their portfolio typically being spread between a range of major asset classes including cash, fixed interest securities, equities, property and other assets.  Portfolio diversification of this type can be expected to lessen risk as well as to generate higher returns over the long run.  To encourage trustees to adopt the portfolio approach, the Government intends to codify in legislation the "prudent man" rule provisions contained in comparable United States legislation (Employee Retirement Income Security Act 1974).

The adoption of a balanced portfolio approach will allow trustees to invest a proportion of funds in areas such as venture capital without breaching their fiduciary obligations.  The Government acknowledges the potential that such investments can have in helping funds to achieve a relatively higher rate of return.  This will not only benefit members but will also provide long-term benefits to the Australian economy in terms of economic growth.

The codification of the "prudent man" rule will not inhibit the operation of specialised wholesale superannuation investment vehicles which may follow a less diversified investment pattern.  These vehicles would allow superannuation funds to hold a diversified portfolio, for example, by investing in several wholesale vehicles, while benefiting from the investment expertise that such vehicles could offer.

The Government considers that the interests of superannuation fund members in having their long-term savings invested in profitable sectors of the economy are compatible with the Government's national interest considerations of ensuring that Australia has a strong, innovative and internationally competitive economy.

The explanatory memorandum introducing this legislative requirement did not explain what the investment strategy requirement meant and why it was being implemented.

Nevertheless it is quite clear from the above that the government has been attempting to push diversified investment portfolios.  That is diversified portfolios to mean a range of asset classes.

However it would be fair to say that the wording of the factors trustees need to consider when drafting an investment strategy requirement do not demand that a diversified portfolio be put in place.  There is only a demand that this issue be considered.

The release of the 1998 Cabinet documents provide details on how the decision was made to change the name of "excluded funds" to "self managed super funds" and move the regulation of these funds from the then Insurance and Superannuation Commission (ISC) to the ATO.  These Cabinet documents contain research provided by the ISC.

This research notes that the lack of diversification in small fund investments is an issue.  It also notes that in relation to the requirement to draft an investment strategy:

The requirement that a fund comply with this investment strategy covenant and prepare a written investment strategy [as an operating standard] was extended to excluded funds on 1 July 1996.

Examination of excluded funds investment strategies from the surveys and field work placed in question the worth of this measure.

It was apparent that in most cases very little thought had been given to the content of the strategy and it had been written, often in generic form, by an adviser to fit the current investment mix of the fund.  It had not, in itself, brought about any change, for example increased diversification, in the mix of assets.

Based on the field work, where a written investment strategy did exist it was considered poor in 44% of cases and very poor in a further 6% of cases.  There were, however, some good strategies in some cases and evidence that the requirements had focussed trustee minds on their investment policy.  In 20% of cases the strategies were rated good or excellent.

Trustees and advisers stated consistently that its only benefit had been to increase the fees payable to the service provider.

Nevertheless it has, at least, required the trustees to formally consider what the investment plan and objectives for the fund should be and to commit this to paper.  In must be recognised, however, that the requirement is of very limited value in addressing some of the questionable investment practises of excluded funds.

After this discussion, the ISC recommendation?  "Keep the investment strategy requirement as is."

As noted above the investment strategy requirement has been an operating standard for SMSFs since July 1996.  This means that for over 20 years the regulator has had the ability to impose penalties for non-compliance with this requirement.  And the ATO now has the added ability to impose an administrative penalty.

From 1 July 2004, SMSF auditors were asked to confirm that SMSFs had complied with the investment strategy requirement.

From 7 August 2012, SIS Reg 4.09's opening paragraph was changed from:

The trustee of the entity must formulate and give effect to an investment strategy that has regard to all the circumstances of the entity, including in particular:

to the following:

The trustee of the entity must formulate, review regularly and give effect to an investment strategy that has regard to the whole of the circumstances of the entity including, but not limited to, the following:

Member Directed Investments

But can an SMSF have member directed investments?  The SIS Act provides as follows:

  • Sub-sec 52B(4) – it says that an investment strategy can be in accordance with the investment strategy covenant requirement if a specified beneficiary or class of beneficiaries give a trustee directions if they relate to the strategy to be followed by the trustee in relation to a particular asset or assets of the fund and these directions are given in accordance with regulations.

The necessary regulations are found in SIS Reg 4.02.  This regulation has different requirements for initial and subsequent directions:

  • Initial directions – a trustee can give a member a choice of two or more strategies for investing their money and tells them that they may choose a strategy or combination of strategies.  The trustee must ensure that the member is fully informed of each strategy's investment objectives and anything else the trustee believes the member needs to know.  The member must also be aware of how many strategies there are and the manner in which they can be change their investment selection
  • Subsequent directions – a member can alter their selected strategy(ies) if they have been given all information a trustee believes they need to make an informed decision and the direction relates to the strategy for investing the members interest in the fund.
  • SIS Sub-reg 4.09(3) – this says that an investment strategy can provide for a specified beneficiary or class of beneficiary to give directions to a trustee if those directions relate to the "strategy to be followed by the trustee in relation to the investment of a particular asset or assets" of the fund and the direction is given in accordance with Reg 4.02 as detailed above.

My best guess is that very few SMSFs would rely on these provisions.

The ATO's latest investment strategy release

You can read the ATO's latest document here

The important points in the document are as follows:

  • A fund's investment strategy "should also be tailored and specific to the relevant circumstances of your fund rather than a document which just repeats the words in the legislation"
  • "Relevant circumstances may include (but are not limited to) personal circumstances of the members"
  • "Your strategy should explain how your investments meet each member's retirement objectives"
  • "…it is not a valid approach to merely specify investment ranges of 0 to 100% for each class of investment"
  • "The percentage or dollar allocation of the fund's assets invested in each class of investment should support and reflect your articulated investment approach towards achieving your retirement goals. If you choose not to use allocated portions or percentages in your investment strategy, you should ensure material assets are listed in your investment strategy. You should also include the reasons why investing in those assets will achieve your retirement goals."
  • "Investing the predominant share of your retirement savings in one asset or asset class can lead to concentration risk. In this situation, your investment strategy should document that you considered the risks associated with a lack of diversification. It should include how you still think the investment will meet your fund's investment objectives including your fund's return objectives and cash flow requirements."
  • Giving effect to an investment strategy means, "ensuring your fund's investments are in accordance with your investment strategy so that you are on track to meet your retirement goals. To help meet this requirement, you could consider specifying appropriate allocations or percentage or dollar ranges for each class of investment ranges that you have chosen for your strategy. These allocations or ranges typically allow some flexibility for market fluctuations."
  • "We don't consider that short term variations to your articulated investment approach, including to specified asset allocations, constitute a variation from the investment strategy."
  • "You should review your strategy regularly to ensure it continues to meet the current and future needs of your members depending on their personal circumstances."
  • "Certain significant events should also prompt you to review your strategy … You should also review your strategy at least annually and document that you have undertaken this review and any decisions made arising from the review."
  • "Your auditor will only need to lodge an ACR [Auditor Contravention Report] notifying us of the breach if it meets the ACR reporting criteria."

Unlicensed Accountants and Assisting SMSF Clients to Prepare or Review an Investment Strategy

It is quite common to hear comments that unlicensed accountants in public practise cannot help their client's draft or review their SMSF's investment strategy.

Before we discuss this in some detail, there are important background points to make:

  1. Sub-sec 766B(5) of the Corporations Act 2001 (Corps Act) states that financial product advice provided by a registered tax agent is not advice requiring an Australian Financial Services License if it "is given in the ordinary course of activities as (sic) such an agent and that is reasonably regarded as a necessary part of those activities"; a registered tax agent can provide advice to clients that helps with the compliance of any legislation administered by the ATO.  It goes without saying that the ATO administers the SIS Act in relation to several matters but of particular interest to us here is the ATO's SMSF administrative responsibilities
  2. Under Reg 7.1.29 of the Corporations Regulations any individual is permitted to provide an eligible service that meets the definition of an exempt service and an AFSL is not required when providing these exempt services.

Firstly, let's look at what an eligible service means.  It involves any of the following:

  • Providing financial product advice – ref to Sec 766B of the Corps Act
  • Dealing in the financial product – ref to Sec 766C of the Corps Act
  • Making a market for a financial product – ref to Sec 766D of the Corps Act
  • Operating a registered scheme
  • Providing a custodial or depository service – ref to Sec 766E of the Corps Act
  • Provide a crowd funding service – ref Sec 766F of the Corps Act
  • The provision of financial product advice to an employer about a default super fund – Corps Reg 7.1.28AA

An exempt service (ie a service not requiring an AFSL) includes the following:

  • advice in relation to the transfer of financial products between associates
  • taxation services:
    • you provide advice about the taxation issues including the tax implications of financial products
    • you will not receive a benefit from a product provider if the person receiving the advice acquires a financial product
    • either the advice does not constitute financial product advice to a retail client or it does constitute financial product advice to a retail client and, at the same time, a written statement is provided that says: a. that the person providing the advice does not hold a financial services license; b. tax is only one aspect that should be considered; c. the person receiving the advice should consider taking advice from an AFSL holder

ASIC Corporations (Recognised Accountants: Exempt Services) Instrument 2016/1151 amended this regulation to permit an limited AFSL holder or an AR of such a license to provide taxation services under this provision as long as such advice is accompanied by a note that a. that the person providing the advice holds a limited AFSL or is a representative of such a licence; b. tax is only one aspect that should be considered; c. the person receiving the advice should consider taking advice from an AFSL holder other than the provider of the taxation advice in question.

  • you provide advice in relation to the establishment, operation, structuring or valuation of a superannuation fund (which is not advice provided for inclusion in an exempt document or statement – this is a complicated area and we will not look at this here except to note that SMSF investment strategies would not be classed as an exempt document) and
    • the person receiving advice is, or is likely to become a trustee, a trustee director, an employer sponsor or a person who controls the management of the super fund
    • the advice is given for the sole purpose, and reasonably necessary for the purpose, of ensuring compliance with the SIS Act or Super Guarantee (Administration) Act – importantly this limitation does not relate to ensuring compliance with the SIS Act or SIS Reg investment strategy requirement
    • the advice does not:
      • relate to the acquisition or disposal of specific financial products or classes of financial products by a super fund
      • include the recommendation that the person acquire or dispose of a super fund
      • include a recommendation in relation to an existing superannuation holding that the person should modify an investment strategy or a contribution level
    • if the advice is financial product advice provided to a retail client then the advice is accompanied by a written statement that: a. that the person providing the advice does not hold a financial services license; b. the person receiving the advice should consider taking advice from an AFSL holder

To be fully exempt from the need to hold a financial services licensee under this rule it must be reasonably necessary to provide the eligible service when performing the exempt service and the eligible service must be an integral part of the exempt service.

The explanatory statement for these regulatory amendments are important.  It says,

"note that while a person can advise on the need for an investment strategy [under the SIS Act and SIS Reg requirements,] … no advice can be given that contravenes the requirements of paragraph 7.1.29(5)(c) – that is, effectively the above paragraph.

 

Advice that may breach paragraph (5)(c) cannot go beyond what is required by the specified legislation.  For example, recommending a trustee purchase a financial product to comply with the need to act in the best interests of the beneficiaries under section 52(2)(c) of the SIS Act would not satisfy the requirement that is 'for the sole purpose and only to the extent reasonably necessary."

The upshot is that an unlicensed accountant can help a client satisfy the investment strategy requirements but cannot do so in a way that would include the recommendation to acquire, retain or dispose of financial products.

3. Broad asset allocation advice – Corps Reg 7.1.33A says that a financial service advice does not require an AFSL if the advice "consists only of a recommendation or statement of opinion provided to a person about the allocation of the person's funds that are available for investment among 1 or more of the following:

  • Shares
  • Debentures
    • debentures, stocks or bonds issued, or proposed to be issued, by a government
    • deposit products
    • managed investment products
    • foreign passport fund products
    • investment life insurance products
    • superannuation products
    • other types of asset.

This exemption however does not extend to specific financial products or classes of financial products."

The explanatory statement for this amendment said that "the intention [of this regulation] is to exclude advice in relation to, for example, shares in general, but not to exclude advice in relation to shares in a particular body."

ASIC Info Sheet 216

An updated version of this document was released in April 2018.

It says that the above licensing exemptions for accountants will apply, "if the financial service happens to be an integral part of or incidental to another type of service typically provided by an accountant – that is, you would reasonably need to provide the exempt SMSF financial service in order to carry out your normal accounting practice".

In relation to helping clients with "asset allocation and investment strategy" this document says, "You may provide a recommendation or statement of opinion on how your client should distribute their available funds among different categories of investments.

"You may not advise your client to make particular investments through the SMSF." (emphasis in original)

In relation to "asset allocation and investment strategy" the document says the following –

"Without an AFS licence, you may not advise your client about their retirement investment strategy, including whether your client should increase or decrease their contributions into their SMSF, what their overall investment strategy should be for their SMSF (e.g. what the target investment return should be and how to achieve this), or what contributions they should make to their SMSF relative to any other superannuation fund of which they are a member.

However, you may provide a recommendation or statement of opinion to your clients on broad asset allocation within their SMSF (regulation 7.1.33A) [refer above] …

Providing a recommendation or statement of opinion to clients on asset allocation within their SMSF is different from providing class of product advice, which requires a licence … The exemption for providing a recommendation or statement of opinion on asset allocation does not apply to making a recommendation on or giving a statement of opinion about specific financial products or classes of financial product: see regulation 7.1.33A.

This means that you may provide a recommendation or statement of opinion on asset allocation among the broad categories listed above, but not among classes of financial product or specific products within those categories. For example, you may recommend that your client hold a certain proportion of their SMSF funds in one of the eligible product types (e.g. shares), but to make any of the recommendations set out [below] … you will need the appropriate licence.

Examples where ASIC says you need to hold an AFSL or be an authorised representative of an AFSL in relation to an SMSF investment strategy:

  • A specific product (e.g. shares issued by a particular company)
  • A particular class of shares (e.g. shares issued by companies in the specific sector)
  • A certain proportion of international shares
  • Shares that may have franked dividends

See here for more information

Conflicted and Confused Market

It is true that the market place gives accountants mixed signals.  There are those who provide a range of services to assist anyone, including accountants, to run an AFSL.  There are those who run AFSLs looking to appoint authorised representatives who are often happy to recruit accountants in public practice.  And there are those who like to think that even talking about any financial matter with a client that is not strictly accounting or tax work and needs an AFSL.

Potential investment strategy questions that can be asked by an unlicensed accountant

The key issue is unlicensed accountants cannot make recommendations about acquiring, retaining or disposing of any financial product as per ASIC's list noted above.  This does not mean that factual issues cannot be discussed together with appropriate disclaimers (see above).

Here is a list of questions unlicensed accountant could ask their clients:

  • An investment strategy serves no purpose unless you are seeking to achieve some sort of objective.  So a good starting question is, why does the fund exist?
  • Many people will probably say something like the following, "To make money."  As no one invests money to lose it, this answer is hardly profound.
  • Perhaps a slightly more sophisticated answer is, "To build up sufficient wealth to provide a good retirement standard of living and to pass on whatever money is left over to my children."
  • What about "to satisfy the SIS Act's sole purpose test"?  As might become evident it doesn't pay to be too cute here.

Once we have settled on a fund's objective(s) our next job is to draft the fund's investment strategy.

When drafting a super fund's investment strategy our job is to consider the whole circumstances of the fund taking into account a range of matters and anything else that might be relevant and show how each investment helps us achieve our investment objectives.  In effect we need to breakdown the investment strategy requirements in SIS Reg 4.09 and decide how each is satisfied with each current investment and each putative investment:

  • the risk involved in making, holding and realising, and the likely return from, the entity's investments, having regard to its objectives and expected cash flow requirements:
    • What assets does our fund own now?
    • How does each investment help the fund meet its investment objective(s)?
    • What assets are we thinking of disposing of or acquiring and why?
    • How would these investment transactions help the fund meet its investment objectives?
    • What are the fund's liquidity requirements and do current or future investment holdings help meet or hinder meeting these liquidity requirements?  (This is not a one year requirement but multi-year cashflow analysis – see below.)
  • the composition of the entity's investments as a whole, including the extent to which they are diverse or involve exposure of the entity to risks from inadequate diversification:
    • Firstly, what do the trustees mean by "diversified"?  Broad asset classes – eg cash, fixed interest, property, shares, etc.  Or within asset classes – for example, a broad range of ASX listed shares from a variety of sectors?  Or a broad cross section of long-standing widely held listed investment companies?
    • If our fund has nearly all its money invested in a single illiquid investment (for example real estate) then what risks have we identified in holding this single asset and how might those risks prevent the fund from satisfying its investment objective(s)?
    • Suppose the fund's real estate investments are leased to a third party.  If that lessee fails to pay rent or leaves at the end of a lease period and a new tenant cannot be found for an extended period, what impact will this have on a fund's liquidity requirements?
    • As has happened recently what will happen if the fund doesn't receive rent for at least six months (no trustee will be able to say contemptuously that such an event will never happen and therefore doesn't need to be considered).
    • Note – it does not seem clear here that a super fund must have a diverse set of investments; this is merely asking us to consider this issue
  • the liquidity of the entity's investments, having regard to its expected cash flow requirements:
    • We have already mentioned liquidity – how are our fund's objectives potentially impacted if we have to fire sale an asset or the bottom falls out of investment markets just as we need to sell assets?
    • If the fund has an LRBA what is the impact if the lender asks for their money back but the asset is worth less than the outstanding loan?  What if the LRBA loan repayments can only be repaid if rent is received and/or compulsory employer super contributions are made to the fund?
    • How long do we need to consider the fund's cash flow requirements?  It would seem prudent to make this at least rolling five years with adjustments to assumptions based on known facts.  Any longer than five years and our analysis maybe less useful
    • If we are paying pensions then does the fund have sufficient expected cashflow even taking into account unusual circumstances such as an unexpected fall in income paid?  How many years of future pension income payments and expenses do the trustees intend to hold in cash at bank?  (At least 24 months of all expected outgoings is often considered to be prudent.)
  • the ability of the entity to discharge its existing and prospective liabilities:
    • What are existing and prospective liabilities?  The former are often relatively easy to determine.  The latter might take a bit of careful thought
    • What would happen if a member benefit had to be paid quickly – for example because of death, disability, compassionate release etc?
    • What would happen if the fund has more than one member and one of those members wishes to, or needs to, leave the fund – for example divorce?  (Many couples may be reluctant to talk openly about this issue but ideally it should be thought about)
    • Are there any assets/investments that would be difficult to liquidate?  Or would take considerable time to liquidate?
    • Are there any assets of the fund that are jointly owned that require the agreement of all owners to sell the asset?  What is the potential for disagreement between owners especially at disposal?
    • What arrangements are in place to ensure surviving trustees know what needs to happen and how? (That is, do they know and understand how and why the SMSF's funds have been invested?)
  • whether the trustees of the fund should hold a contract of insurance that provides insurance cover for one or more members of the fund:
    • This requirement is quite self-explanatory – should the trustee hold insurance for one or more members of the fund
    • A trustee could consider this issue by looking at the insurance each member needs and comparing that to insurance already held whilst also considering if a suitable policy or policies for an appropriate price could be purchased by the SMSF trustee

The above is not an exhaustive list of potential questions or issues to address.

And trustees are free to consider any additional issue that they believe needs to be addressed in relation to their fund's investment strategy.

The main point to remember is that there is no right or wrong answer in relation to the investment strategy with one exception – the strategy needs to be consistent with the assets that the fund holds.

Documenting the investment strategy

Whilst the SIS Act and Regs do not demand that an investment strategy be in writing, it would seem difficult for an auditor to review what is in someone's mind.

Zero to one hundred percent asset class ranges

It would seem to me that after the above discussion the use of 0% to 100% investment class ranges wouldn't be appropriate.

How did trustees reach their decisions?

It is a perennial problem for the trustees of any trust – do we explain how we made a decision or do we simply provide details of the decision that has been made?  Provide details of how you made a decision and the process you used can be examined and contested.  So perhaps the better course of action is to simply record a trustee's decisions on each Reg 4.09 limb and any other relevant point.

Visit the ATO website for more information

Your investment strategy is your plan for making, holding and realising assets consistent with your investment objectives and retirement goals. It should set out why and how you’ve chosen to invest your retirement benefits in order to meet these goals.

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