The COVID-19 pandemic has seen sudden falls in shares and other investment values over the last four months. As a result, SMSF investments and superannuation balances have been adversely affected. You may wonder what impact this has on an SMSF's ability to comply with its Investment Strategy. The ATO has recently provided some guidance on this as part of its COVID-19 Frequently Asked Questions. This article outlines what action trustees can and should be taking with respect to their Investment Strategies during this time.Melissa Ramov, Maddocks Lawyers
Superannuation law requires all SMSFs to have an Investment Strategy (or strategies). The Investment Strategy acts as a framework for the SMSF trustee(s) when making investment decisions on behalf of the SMSF, with the goal of increasing members' benefits for retirement.
During the life of the SMSF, the needs of the members change. The Investment Strategy needs to take into account the following considerations:
There are standards which apply to the operation of SMSFs which concern Investment Strategies. The trustee must formulate, regularly review and give effect to an Investment Strategy which has regard to the above considerations (which are discussed in more detail here).
As a result of the COVID-19 pandemic, it may be hard for trustees to strictly adhere to their SMSF Investment Strategy and trustees may find that they need to review and make changes to the document.
For instance, the rapid decline in financial markets which occurred in March 2020, followed by wild and unpredictable fluctuations ever since, means that allocations to particular assets, classes of assets, or industries, may be well outside the metrics contemplated in the SMSF's Investment Strategy. For example, members may find that the level of investment in a particular asset class - such as listed retail stocks - falls well outside preferred range stated in the Investment Strategy. Two considerations may arise:
Similarly, if the SMSF is invested in commercial property or unlisted property trusts, a similar evaluation of the correct investment settings, and when to take action to match asset holdings to preferred asset allocations, would need to be undertaken.
The ATO in its guidance has confirmed that trustees should take action to address such situations by adjusting investments or updating the Investment Strategy.
However, these are not easy judgments for SMSF trustees to make, particularly while the financial markets and surrounding economic conditions continue to exhibit volatility.
The ATO's guidance appears to support an approach of reviewing the Investment Strategy, revising it to the effect that it will be regularly reviewed during the ongoing volatility and that details in the Investment Strategy such as preferred asset classes, and preferred asset allocation percentages, will be adjusted over time as economic conditions settle.
During significant events such as market shocks and associated medium term volatility, Investment Strategies should be promptly and consistently reviewed and updated. This process can be assisted by the SMSF trustees ordering an Investment Strategy product through Cleardocs, by which they can record the trustees' decision-making (and evidence that process) in writing as required by superannuation law.
For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of the Commercial team.
Paul is a Special Counsel in the Maddocks Commercial team with particular expertise in commercial agreements for the supply of goods and/or services, the Personal Property Securities Act 2009, the National Consumer Credit Protection Act 2009 and the National Credit Code and the Australian Consumer Law.
Paul's key areas of practice include:
Before joining Maddocks, Paul was employed for 13 years with the Victorian Department of Justice, principally as a Deputy Registrar in the Victorian Magistrate's Court, but also as a legislation, policy and project officer for the Department.
The legal information and commentary on this site is general only. Documents ordered through Cleardocs affect the user's legal rights and liabilities. To assess their suitability for the user, legal accounting and financial advice must be obtained.