Getting your investment strategy for your SMSF right is vital!

Have you considered your SMSF’s goals and objectives before investing SMSF money? In 2019, the ATO increased its focus on SMSF investment strategies, in particular diversification. The ATO’s focus was aimed to educate Trustees of SMSFs to consider diversification, risks, cash flow, liquidity and insurance when making investment decisions for the SMSF and updating the investment strategy when required.

Why is an investment strategy important?

Regulation 4.09 of Superannuation Industry (Supervisions) (SIS) Regulations 1994 requires that an up-to-date investment strategy is kept by the Trustees. 

As part of the annual audit, the SMSF auditor will review the investment strategy to ensure compliance with Reg 4.09. However, it is not the auditor’s job to pass judgement on how the trustee has invested. The investment strategy should detail what the Trustee is trying to achieve.

In Ryan Wealth Holdings Pty Ltd v Baumgartner, the NSW Supreme Court found that the Trustee had not invested the SMSF’s money in accordance with the investment strategy prepared.

The investment strategy prepared by the Trustee in the Ryan Wealth case had several issues:

• Trustee wished to invest for the long term, to fund the retirement needs of the members including membership profiles. The sole member of the fund had already retired.
• Trustee had stated that risk would be minimised by investing a spread of investment and investing directly in different type of assets. However, the investments were in high-risk property development ventures with unsecured mortgage loans
• The investment strategy stated that the trustee would predominantly invest in investments that could be converted to cash within 90 days if required. However, as the majority of investments were in property development that could not be converted to cash in 90 days, this was not met.

What needs to be considered when updating your investments strategy?

Trustees have a range of responsibilities under both Trust Deed and legislative responsibilities.  When preparing an investment strategy, Trustees need to consider: 

• The risks involved in making, holding and realising, and the likely return from, investments regarding its objectives and cash flow requirements;
• The diversification of the fund assets, and whether a lack of diversification causes further risks;
• The liquidity of the fund’s assets, and whether liquidity is important based on the member needs;
• The fund’s ability to pay benefits and the other essential costs of running the fund; and
• Whether appropriate insurance cover is held for each member of the fund.

Trustee need to ensure that the investment strategy is reviewed each financial year, and potentially at the point of a new investment if it does not fit within the current investment strategy. 

How have the recent changes impacted investment strategies?

From 1 July 2021, the maximum number of members in an SMSF (and small APRA funds) increased from four to six. For a Trustee, this requires revisiting the investments strategy to ensure that the strategy meets the need of all members.

In addition, there has been a rise in cryptocurrency and NFT investments, which may mean that your current investment strategy no longer fits the investments being made or contemplated. 

Are there restrictions?

Trustees need to make sure that the investment strategy, and as a result the investments made, comply with:

• The current Trust Deed,
  
• The investment is not prohibited by super laws,
  
• Meets the sole purpose test, and
  
• Doesn’t trigger the in-house asset rules. 

How can Tax Controversy Partners help you?

Firstly, it is important that you carefully consider your position as early as possible if you concerned about compliance in your SMSF. An unexpected taxation debt arising in an SMSF can not only be devastating but also impact the members hard-earned retirement funds.  

Obtaining legal advice before it is too late is important. As expert tax lawyers with great experience with SMSF issues, we can provide you with detailed advice on your circumstances, guide you through making the best choices for you and help you to manage any engagement with the ATO.  

At Tax Controversy Partners, our experienced lawyers can represent your best interests in providing advice that is compliant with the current case law and legislation and based on our understanding of likely ATO actions. 

Please contact us using our online contact form, via email at admin@taxcontroverypartners.com.au or by phone at 02 8513 3813.