A solid investment strategy is not only integral to the success of your self-managed super fund (SMSF), but it can also provide you with protection if you’re ever called upon to justify an investment decision in the event of a loss.
The investment strategy sets out your super fund’s investment objectives and the methods it will adopt to achieve those objectives. It enables SMSF trustees to make investment decisions consistent with their objectives and to increase and protect members’ benefits for their retirement.
Having an investment strategy for your SMSF is not optional. The legislation requires each trustee to formulate and give effect to a strategy that has regard to the circumstances of the SMSF as a whole. When making investment decisions, these duties and obligations are imposed on SMSF trustees by super law. The investment strategy obligation forms part of the Superannuation Industry Supervision Act 1993 (SIS) covenants in section 52(2)(f) and these should be included in the governing rules of the SMSF.
What your strategy should include
The strategy should include, but is not limited to:
- The risk involved in making, holding and realising, and the likely return from, the SMSFs investments with regard to the fund’s objectives and expected cash flow requirements;
- The composition of the SMSF’s investments as a whole, including the extent to which the investments are diverse or involve the fund being exposed to risks from inadequate diversification;
- The liquidity of the SMSF’s investments with regard to its expected cash flow requirements; and
- The ability of the SMSF to discharge its existing and prospective liabilities.
Also if the SMSF has any reserves, the trustees must formulate and give effect to a strategy for their prudential management consistent with the SMSF’s capacity to discharge its liabilities (whether actual or contingent) as and when they fall due.
Things to consider
The investment strategy should also take into account, among other considerations, the size of the SMSF, its tax position, its membership profile, the costs of administrating an investment, ongoing management costs, access to appropriate advice and engagement of professionals. The strategy should be continually monitored, reviewed regularly and updated when necessary. This is especially important to keep it relevant and updated in light of legislative amendments, member profile changes and changes in the economic climate and financial or investment markets.
Trustees should also address any limitations or investment constraints, such as the sole purpose test and other specific investment standards of the SIS Act. These include borrowing restrictions (section 67), prohibition on acquisition of assets from related parties (section 66), prohibition on financial assistance to members and their relatives (section 65), in-house asset restrictions (section 71) and arm’s length requirements (section 109).
Write it down
There is no explicit requirement for the investment strategy to be in writing, but it is the most prudent method to prove that an investment is made within the strategy framework. This is important because the SIS Act permits a person, such as a member or their dependant, who has suffered a loss or damage from an investment to recover the amounts of that loss or damage from the trustee. However, the investment strategy forms a defence if the trustee establishes that the investment was made in accordance with an investment strategy formulated under the covenant in section 52(2)(f).
Further, a contravention of the requirement to have an acceptable investment strategy can result in the trustees being fined or sued for loss or damages. The fund can lose its compliance status and, as a result, its concessional rate of tax. A trustee who intentionally or recklessly fails to comply with their investment strategy is guilty of an offence and liable to a penalty.
So while an investment strategy is an important legal requirement, it is also a practical approach to ensure that the SMSF’s assets are invested appropriately to provide benefits for members in their retirement.
Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
