Create your SMSF investment strategy

Understand SMSF investment requirements and creating your fund’s investment strategy.

SMSF investments

Before your self-managed super fund (SMSF) starts making investments, you must understand the investment requirements and have an investment strategy that reflects them.

Your investments must:

• be permitted by your fund’s trust deed and in accordance with superannuation laws
• show clear legal ownership by the fund
• be made on a commercial arm’s length basis and always reflect true market value
• meet the sole purpose test.

Sole purpose means your fund is set up and maintained for the sole purpose of providing retirement benefits to your members, or to pay death benefits to members’ beneficiaries.

Investment restrictions

While there are some exceptions, generally restrictions on investments mean:

• you can’t acquire assets from, or lend money to, fund members or other related parties
• your fund can’t borrow money.

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

Investment strategy

Super laws require that you:

• prepare and implement an investment strategy for your SMSF
• put into practice and review the strategy regularly.

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 your investments to meet these goals.

A licensed financial adviser can help you prepare the strategy, but you are responsible for managing the investments in:

• the best financial interests of the SMSF’s members
• accordance with the law.

Take care if you’re using a standard investment strategy template as they:

• may not meet superannuation rules
• must be appropriately tailored to your fund’s circumstances
• must be reviewed regularly as required by super laws.

What to include in the strategy

Your SMSF investment strategy should be in writing and tailored specifically 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. You should consider factors such as their:

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

There is no prescribed format. Every investment strategy needs to consider the particular circumstances of the SMSF and its members. For instance, it should consider:

• risk and the likely return from your fund’s investments, to maximise member returns
• composition and diversity of your fund’s investments, and the risks of inadequate diversification
• liquidity of the fund’s assets (how easily they can be converted to cash to meet fund expenses and pay member benefits)
• 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 just specify investment ranges of 0 to 100% for each class of investment. You also need to state:

• how you plan to invest your super
• 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 achieving your retirement goals.

If you choose not to use allocated portions or percentages in your strategy, you must list material assets and why investing in those assets will achieve your retirement goals.

Member insurance cover

Your SMSF can consider providing insurance for a member for an event that is consistent with one of these conditions of release of the member’s super:

• death
• terminal medical condition
• permanent or temporary incapacity (causing the member to cease working).

SMSFs generally cannot provide trauma insurance for their members as this does not meet the sole purpose test and is not consistent with one of the conditions of release.

To meet the sole purpose test, the following conditions must be met:

• Any benefits payable under the policy must be paid to the SMSF.
• Those benefits will become part of the assets of the SMSF at least until such time as the relevant member satisfies a condition of release.
• The policy was not acquired to secure some other benefit for another person, such as a member or member’s relative.

Risks with investing all your savings in one asset

While you can choose to invest all your retirement savings in one asset or asset class, having a diverse portfolio will spread your investment risks.

Investing most 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 think the investment will still meet your fund’s investment objectives, including investment returns and cash flow requirements.

Asset concentration risk is higher for leveraged SMSFs, 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 rules are breached.

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

Reviewing your strategy

You should regularly review your investment strategy to ensure it continues to meet the current and future needs of your members.

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 (because you need to ensure the fund can meet minimum pension payments).

Review your strategy at least annually and document that you have undertaken this review and any decisions made. You could do this as part of the annual trustee meeting minutes.

Provide the evidence of a review to your auditor to show you’ve regularly reviewed and, where necessary, revised your investment strategy.

If your strategy isn’t compliant

Each year your SMSF is required to be audited by an SMSF auditor. If your auditor identifies that you have breached the investment strategy requirements, then you must 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 that 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 needs to lodge an auditor contravention report (ACR) notifying ATO of the breach if it meets the ACR reporting criteria.

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