The Australian Tax Office (ATO) has recently issued letters to 17,700 SMSF trustees reminding them of their Trustee obligations and with a particular focus on the need for a SMSF trustee to have in place an investment strategy that they have prepared for their fund.

When developing the fund’s investment strategy, you are required to take into consideration diversification and liquidity of the funds’ assets.

It is our view that the ATO sent this communication as a means to remind trustees of these obligations; it is not a notice to these trustees that they have breached the law. However, take note that if you do not have an investment strategy that is relevant for your fund then this would be a breach and possible result in fines being applied.

It is also worth noting that where you do have an investment strategy in place but it does not cover the required issues such as diversification and liquidity of assets, cashflow requirements for your particular fund and the insurance needs for the fund members, then this would also be a breach and could also result in fines being applied.

Recent data released from the ATO suggests that there is a much higher number of SMSF’s that hold the majority (90% or higher) in either one single asset or only one asset type (shares, properties, cash etc.). Again, so long as the trustees of these funds can demonstrate that they have assessed the particular circumstances of the fund members AND that the current assets of the fund are aligned to the needs of the members, then there may not necessarily be an issue.

However, there is a risk where:

  • You do not have an investment strategy in place; or
  • You do have an investment strategy in place but it is not relevant for your fund; or
  • An investment strategy exists but the rules around what must be covered within the strategy are not adhered to.

As a reminder, when developing your funds investment strategy, you are required to consider the following areas and how they apply to the members of “your” fund:

  • The relevant risks that arise where you invest the funds money or continue to hold existing assets of the fund.
  • Consideration should be given to the expected return on the fund’s assets and if these align with the cash flow requirements of your SMSF. In making such an assessment, the existing liquidity of the fund should be considered.
  • Liquidity and cash flow requirements for your fund will change over time, so make sure that your fund can meet the current and future expenses and/or liabilities that arise.
  • The diversification of the assets that you hold within your fund and any risk that may be associated with holding a large percentage of your funds’ assets in either the one asset or where the assets are not diversified.
  • If the trustees should consider holding insurance coverage for each member of the fund.

Your investment strategy should adapt and change as the needs and circumstances of the fund members change. In fact, it is actually a requirement that you “regularly” review the strategy. We suggest that this be at least once a year or where an event occurs that could require a change in the strategy. These events could include:

  • A new member joining your fund or a member leaving.
  • A member retiring and starting a pension.
  • A change in the underlying economic environment (property market, share market, interest rates etc.).

The key is being able to show that your investment strategy reflects the needs of the members. So if your SMSF does lack diversification or holds one asset that makes up a high percentage of the overall fund balance, then so long as you are in a position to show how you arrived at this position and that the members need are met, you have not breached the laws. Unfortunately, many SMSF trustees can’t prove this! Keeping records of how decisions have been arrived at is essential.

How can we help?

If you have any concerns or would like assistance in updating or reviewing your fund’s investment strategy, then please contact our office. We are here to help.