Your self-managed superannuation fund (SMSF) investment strategy

How to develop your self-managed super fund (SMSF) investment strategy and achieve your investment objectives.

What is an SMSF investment strategy?

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 to meet these goals.

The super laws require that you must:

• prepare and implement an investment strategy for your SMSF
• give effect to and review the strategy regularly.

What to include in the strategy

Your SMSF investment strategy should be in writing and be tailored and specific to your fund’s circumstances. It should not be a repeat of the legislation.

It should explain how your investments meet each member’s retirement objectives. Relevant circumstances of the members may include (but are not limited to) their:

• age
• employment status
• retirement needs which influence the risk appetite.

Under the super laws, your strategy must consider the following specific factors regarding the whole circumstances of your fund:

• risks involved in making, holding and realising, and the likely return from your fund’s investments regarding its objectives and cash flow requirements
• 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
• 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)
• 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
• whether to hold insurance cover (such as life, permanent or temporary incapacity insurance) for each SMSF member.

When formulating your investment strategy, 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 strategy requirements.

The percentage or dollar allocation of the fund’s assets invested in each asset class 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 strategy, you must list material assets. Also include the reasons why investing in those assets will achieve your retirement goals.

Restrictions to what your SMSF can invest in

• You are free to choose what type of assets you invest in, providing those investments:
• are permitted by your fund’s trust deed
• are not prohibited by the super laws
• meet the sole purpose test.

For instance, be aware of the:

• in-house asset rules
• acquisitions from related party rules
• non-arm’s length income rules for income tax purposes.

Where your investments breach the super laws, we can take compliance action against you. Depending on the severity of the breach, we may apply penalties and potentially disqualify you as trustee.

Risks with investing all of your savings in one asset

While you can choose to invest all your retirement savings in one asset or asset class, risks such as return, volatility and liquidity can be minimised if you invest in a variety of assets. This is called a diversified portfolio which helps to spread investment risk.

Investing the predominant share of your retirement savings in one asset or asset class can lead to concentration risk. In this situation, your strategy should document:

• that you considered the risks associated with a lack of diversification
• how you still think the investment will meet your fund’s investment objectives including your return objectives and cash flow requirements.

Asset concentration risk is heightened in highly leveraged funds, such as where the trustee has used a limited recourse borrowing arrangement to acquire the asset. This can expose you to a loss in your retirement savings if the asset declines in value. It could also trigger a forced asset sale if loan covenants (for example, the loan to valuation ratio) are breached.

Super laws also require you to invest in accordance with the best financial interest of all members. You need to be aware of any legal risks that may result from investing in one asset class.

Giving effect to your strategy

The super laws require that you as trustee must formulate and regularly review your fund’s investment strategy. You must also give effect to an investment strategy that has regard to the whole of the fund’s circumstances.

This 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, percentages or dollar ranges for each class of investment. This typically allow some flexibility for market fluctuations.

However, broad investment ranges between 0% to 100% in a broad range of assets do not reflect proper consideration in satisfying the strategy requirements. Your strategy must articulate how you plan to invest your super to meet your retirement goals.

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.

Reviewing your strategy

Your investment strategy should not be a ‘set and forget’ document. Review it 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, such as:

• a market correction
• when a new member joins or departs the fund
• when a member starts receiving a pension – this ensures the fund has sufficient liquid assets and cash flow to meet minimum pension payments before 30 June each year.

Review your strategy at least annually and document that you have undertaken this review and any decisions made arising from the review.

For example, you could do this as part of the annual trustee meeting minutes. Provide these minutes or other evidence of a review to your auditor. This shows that you met the requirement to review regularly and, where necessary, revised your investment strategy.

Auditor’s role

When conducting the annual audit on your fund, your auditor will check whether it meets the investment strategy requirements under the super laws for the relevant financial year. This means they will check that your:

• SMSF had an investment strategy in place for the relevant financial year that considered the factors outlined above
• fund’s investments during the relevant financial year were in accordance with that strategy
• strategy had been reviewed at some stage during the relevant financial year.

Where you don’t comply with the investment strategy requirements, your auditor may need to notify us about this by lodging an auditor contravention report (ACR).

If your strategy isn’t compliant

If your auditor identifies that you have breached the investment strategy requirements, then you should fix the breach.

If your strategy failed to adequately address some of the factors mentioned above, such as the risk of inadequate diversification, fix this by attaching a:

• signed and dated addendum to the strategy
• trustee minute which adequately addresses the requirements.

Show this to your auditor before the audit is finalized.

If you failed to invest in accordance with your strategy, revise it to ensure it reflects your fund’s investments and how they will meet your retirement objectives. Then make sure you regularly review and adhere to your new strategy in the future.

Your auditor only needs to lodge an ACR notifying us of the breach if it meets the ACR reporting criteria. For most funds, the criteria will be met if either:

• the auditor has identified the same breach in a previous income year and it has been repeated in the current income year
• it is a breach from a previous year that remains unrectified at the time of audit.

However, the criteria may also be met if the fund is less than 15 months old and the value of any single breach exceeds $2,000.

After your auditor lodges an ACR

If your auditor is required to lodge an ACR and the breach has not been rectified, we will ask you to rectify it.

A penalty can be applied on each individual trustee or the corporate trustee for a breach of the investment strategy requirements. The directors of a corporate trustee are jointly and severally liable to pay this penalty.

Getting helps with your strategy

We cannot help you prepare your SMSF investment strategy as this could amount to the provision of financial advice. If you need help, reach out to your usual SMSF adviser or a licensed financial adviser.

Note that your usual adviser may not be a licensed financial adviser and legally capable of assisting you. They may be able to guide you on where to find resources such as an investment strategy template.

Take care with standard investment strategy templates because they:

• may not satisfy the super rules
• must be appropriately tailored to your fund’s circumstances as discussed above
• must be reviewed regularly as required by the super rules.

If you have any questions, feel free to ask them in the comment section. We will be happy to answer all your queries.