Is Your Investment Strategy Complying With Super Laws?

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 trustees to understand what is needed to develop a compliant investment strategy.

There is no prescribed format for the investment strategy under superannuation law, however there are specific factors that the investment strategy must consider:

• 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)
• the ability of the fund to meet its existing and prospective liabilities (such as when members retire and require a lump sum payment or regular pension payments)
• whether to hold insurance cover (such as life, permanent or temporary incapacity insurance) for each member of your SMSF.

The ATO in its guidance has noted when the trustees formulate the investment strategy it is not a valid approach to specify investment ranges of 0 – 100% for each class of investment.  The trustees should also articulate how they plan to invest their super or why they require broad ranges to achieve their investment goals.

What is the auditor’s role in relation to the SMSF investment strategy?

When conducting the annual audit on your fund, the auditor will check whether your fund has met 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
• your fund’s investments during the relevant financial year were in accordance with that strategy
• your strategy had been reviewed at some stage during the relevant financial year.

Where you don’t comply with the investment strategy requirements, such as being outside the investment ranges, we would recommend an updated strategy is prepared and provided to the auditor prior to the finalisation of the audit report.  For other matters it may be suitable to attach a signed and dated addendum to the strategy or a trustee minute which adequately addresses the requirements.

If you have any concerns regarding your investment strategy, please contact us so that we can assist you in maintaining a complying investment strategy when it comes to your annual audit.