SMSF Investment Strategy
Does an SMSF need an investment strategy?
Yes, superannuation law requires that the trustee(s) of the SMSF formulate, review regularly and give effect to an investment strategy.
What is an SMSF investment strategy?
There is no set form for an investment strategy.
An SMSF trustee may create, regularly review and give effect to their own strategy, provided it takes into account the SMSF's circumstances, including:
- the risk involved in making, holding and realising, and the likely return from, the fund's investments, having regard to its objectives and expected cash flow requirements;
- the composition of the fund's investments as a whole, including the extent to which they are diverse or involve exposure of the entity to risks from inadequate diversification;
- the liquidity of the fund's investments, having regard to its expected cash flow requirements;
- whether reliable valuation information is available in relation to the investments covered by the strategy;
- the ability of the fund to discharge its existing and prospective liabilities;
- the expected tax consequences for the fund in relation to the investments covered by the strategy;
- the costs that might be incurred by the fund in relation to the investments covered by the strategy;
- whether the trustee should hold a contract of insurance covering one or more of the fund's members; and
- any other relevant matters.
The trustees should ensure that they take the above factors into account when formulating the investment strategy, when making investment decisions and when re-evaluating the investment strategy and investment portfolio and should record its consideration of the factors in a set of minutes.
SMSF trustees will also need to:
- ensure that their investments do not contravene superannuation law — such as restrictions on investing in, giving loans to and entering leases and lease arrangements with related parties (so-called 'in house assets'); and
- be aware of their obligations as trustee — such as to make and maintain investment decisions on an arm's-length basis.
You should obtain professional advice about your investment strategy. You may wish to have a professional advisor prepare your investment strategy for you — but the trustee remains responsible for managing the SMSF's investments in accordance with superannuation law and the SMSF's trust deed.
How regularly can an SMSF change its investment strategy?
There is no legislative requirement that specifies how often an SMSF's investment strategy should be reviewed. Good practice would suggest the investment strategy be reviewed at least once a year and take into account factors such as the changing circumstances of the SMSF and its members together with the circumstances set out in the FALQ titled "What is an SMSF investment strategy?" (together, the Factors).
A change in circumstances could include:
- acquisition or disposal of a material fund asset;
- adding a new member to the SMSF;
- a member commencing a pension;
- death or incapacity of a member of the SMSF;
- where the members of the SMSF enter into a marriage or domestic relationship, or there is a breakdown of that arrangement;
- a change in the financial needs of the members of the SMSF;
- where there has been significant market volatility; or
- trustees wish to undertake new investment activities not permitted by the current investment strategy.
It is important to note that the trustees do not necessarily have to change the SMSF's investment strategy at each review but the investment strategy must be reviewed to ensure it is still appropriate for the SMSF and its members. The trustee must ensure that it records the review of the SMSF's investment strategy and that it has turned its mind to the Factors in a set of minutes.
How can the SMSF's investment strategy be varied?
The Cleardocs SMSF Investment Strategy states that the trustees reserve the right to alter the investment strategy at any time. When the trustees wish to amend the investment strategy, they can order a new investment strategy using the Cleardocs SMSF Investment Strategy product.
What is a derivative risk statement?
A derivative risk statement (DRS) supplements an SMSF's investment strategy where the investment strategy permits the trustees to invest in derivatives.
A derivative is a financial contract or instrument that derives its value from another underlying security, or other assets or indices. Examples of derivatives include swaps, options, forwards, futures, warrants, contracts for difference (CFD) and other related instruments.
The DRS assists the trustees by providing policies and guidance on the use and control of derivatives (including risk management), and compliance processes to ensure the controls are effective (such as reporting procedures and internal and external audits).
After formulating the SMSF's investment strategy, when does it take effect?
The Cleardocs SMSF Investment Strategy takes effect when it is approved and signed by the trustees or directors of the trustee.
What happens if a trustee invests in an asset type not permitted by the SMSF's investment strategy?
If the trustees either accidentally or intentionally invest in an asset type not permitted under the investment strategy, then the trustees will be in contravention of the investment strategy and, if the SMSF has a Cleardocs SMSF Deed (or deed with similar investment provisions), the governing rules of the SMSF.
Under these circumstances, the trustees need to consider the following options:
- dispose of that asset or assets and where appropriate, reinvest those funds in a permitted investment under the investment strategy; or
- amend the SMSF's investment strategy to permit them to invest in that particular investment provided that it is in the best interests of the SMSF, and have the SMSF's members approve these arrangements.
This contravention may be discovered by the SMSF's auditor, who will request the trustees to correct this. If the members suffer loss as a result of the contravention, the members may be able to recover the amount of that loss from the trustees.
In the case of more severe contraventions, the ATO may be made aware of this issue and has the power to enter into agreements with the trustees about a plan for the trustees to rectify the problem, without necessarily imposing any sanctions. If the circumstances require sanctions to be imposed in order to protect the member's retirement incomes, then the ATO may by written notice given to the trustees, direct the trustees not to dispose of, or otherwise deal in a particular way, with any of the assets of the SMSF until the notice is revoked, or in more serious cases, suspend, remove or disqualify one or more trustees.
Who needs to sign the investment strategy?
Each trustee of the SMSF will need to sign the investment strategy along with minutes of meeting of the trustees adopting that strategy.
After creating an investment strategy using the Cleardocs SMSF Investment Strategy product, are any earlier investment strategies automatically replaced?
Yes. To cover the situation where an SMSF's earlier investment strategy does not specify a period the investment strategy is approved for, the Cleardocs SMSF Investment Strategy states that this investment strategy revokes any earlier investment strategies.
Does the SMSF need to register or lodge the investment strategy?
No, the SMSF does not need to register or lodge the investment strategy with any government or statutory body. Under superannuation law, the SMSF must ensure that a copy of the strategy and any associated meeting minutes or resolutions are kept with the SMSF's records for a minimum of 10 years.