As a trustee of a self-managed super fund (SMSF), you are ultimately responsible for your own retirement savings and as part of this, you as trustees are required to consider how you manage your fund assets. As such, you are required to regularly review your fund's investment strategy.
The investment strategies of SMSFs are under scrutiny from the ATO, as they have begun contacting SMSF trustees about a lack of asset diversity. They are concerned that “a lack of diversification can expose the SMSF and its members to unnecessary risk if a significant investment fails.”
This does not mean that you must have diversity in your fund. A lack of diversity might be a strategic decision by the trustees, but you need to be able to prove that the strategy was an active decision and justify your decision to the ATO if they ask.
The Superannuation Industry (Supervision) Regulations require that trustees regularly (annually, or whenever significant changes are made to the fund) review and put an investment strategy into place that has considered the circumstances of the entity. To do that you need to:
- Recognise the risk involved in the investment, its objectives and the cash flow of the fund
- Review the diversity of the investment strategy (or otherwise) and the exposure of a lack of diversity
- Assess the liquidity of the investment and cashflow requirements of the fund
- Assess the ability of the fund to discharge its liabilities, and
- Review and have in place appropriate insurance cover for members and assets
The 17,700 people being contacted by the ATO hold 90% or more of the fund’s assets in a single asset or single asset class, with property being one of the problem areas the ATO is looking at. With property prices at a low point, the asset value of many funds has diminished.
It is our view that the ATO sent this communication as a means to remind trustees of their 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 possibly 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.
Your investment strategy should adapt and change as the needs and circumstances of the fund members change. It is 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. Keeping records of how decisions have been arrived at is essential.
If you have any concerns or would like assistance in updating or reviewing your fund’s investment strategy, then please contact our office. We're here to help.