Our work administering 4,000 funds and helping other practitioners with their SMSF queries has given us a useful insight into the key points an investment strategy needs to include to pass audit each and every year.
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The superannuation law requires all self managed super fund (SMSF) trustees to “formulate, regularly review and give effect to” an investment strategy for their fund. With the ATO able to impose penalties on trustees who fail the investment strategy requirements, it is important for all trustees to understand what is needed to develop an ATO compliant investment strategy.
There is no prescribed format for an investment strategy and the law does not dictate precisely what should be included. However trustees must consider six key factors:
So, after I’ve decided on my strategy taking into account the factors above, how do I go about putting my strategy into a document acceptable to the ATO and my fund’s auditor?
It is actually relatively easy - neither the fund’s auditor nor the ATO can review what is in your head so they simply need you to write down what you considered. And what they are interested in is the fact that you actively considered all these things, not second guessing the choices you made.
Blindly following a template which simply repeats the six factors above will not be sufficient.
Make sure your strategy is tailored and takes into account the specific circumstances of your fund. For example, the age and expected retirement date of the members, their overall risk profile, the asset allocation of the members outside superannuation, the fund’s expected liquidity needs etc.
Trustees need to provide a way of demonstrating that their strategy has been implemented. Usually this means including target asset allocation ranges. Doing so provides a quick way for you (and the fund’s auditor) to check that the fund’s investments are in line with its strategy.
We include them in our investment strategy document to demonstrate that the trustee not only has an aim (the objective) but also has a plan to achieve it. The target asset allocations provide some information about that plan.
You need to make sure the asset allocation ranges are wide enough to allow for normal market fluctuations but not so wide to be meaningless. Ranges of 0 to 100% for each asset class would not normally be appropriate without also explaining why you needed such broad ranges to achieve your investment goals.
The superannuation law does not require your fund’s investments to be diversified, but you do need to have considered diversification. There may be circumstances where, after considering all the appropriate factors, you decide to invest in a single asset class or even a single asset. In this case, to demonstrate you have given due regard to diversification, you should acknowledge the risks associated with a lack of diversification and explain why you believe the potential fund returns will provide appropriate recognition of that risk. Merely saying you have considered diversification is not enough.
In developing your investment strategy, you need to ensure the fund’s assets will be sufficiently liquid to allow for payment of the fund’s liabilities as and when required.
Things you will have thought about and explanations you need to document include:
Your investment strategy should not be a “set & forget” document. It is not sufficient to only formulate an investment strategy; you must also implement it. That is, you must also invest the fund’s assets in accordance with your documented strategy. Your auditor will be able to easily assess this if you include target asset allocation ranges.
Having said that, it is worth highlighting that it is not illegal to invest outside the asset allocation ranges in your strategy.
Many funds will be in this position from time to time – particularly if (say) there are large falls across the board in a major asset class such as Australian shares. The important part is acknowledging that it is happening and what action you are going to take, which could include choosing to make no changes to either the fund’s investments or the strategy in the short-term.
Which leads me to the final step – reviewing your strategy.
You are required to regularly review your investment strategy to ensure the strategy remains appropriate for the fund’s circumstances and your documented investment objectives are being met.
The approach we generally take is to ensure trustees review their strategy at least annually (as part of the normal year end process of signing accounts and tax returns) and also whenever there is a major change to the fund’s circumstances. For example, when:
This review should be documented in the form of a trustee minute or resolution, detailing whether the strategy remained appropriate or changes were made, which can then be provided to the fund’s auditor.
The Heffron Super Toolkit’s Investment Strategy is a quick and easy-to-use guided tool which will step you through the things you need to consider and articulate to produce a document that will withstand ATO and auditor requirements. It is designed so your fund accountant or adviser kicks off the process, then shares it with you to finalise and complete or simply review and confirm. Your accountant or adviser can register for a demonstration or subscribe here: https://www.heffron.com.au/services/super-toolkit