The ATO’s recent mail out to SMSF trustees who have high concentrations in one asset, or a single asset class, has stirred up wide discussion on SMSF investment strategies. The ATO’s stance provides a wakeup call to all trustees to review their fund’s current strategy, including justification of their decisions, before the next fund audit.

When speaking to many SMSF trustees I find it’s clear they have some great ideas about the fund’s investments and the reasons for what is happening.  However, the problem is that all the information is in their head and they’ve failed to put it down in writing.  I often find that trustees have completed a standard investment strategy template which neglects to consider the fund’s specific circumstances, but that’s what the ATO is really after.

To comply with the investment strategy requirements of the SIS legislation I consider the trustees’ need to address the fund’s liquidity and the cash-flow needs, risks involved with making, holding and realising investments, discharging liabilities and the members’ insurance needs.  If your SMSF does not cover these requirements and justify the actions of the trustees, then I think you are faced with one of two options:

1. Replace the current investment strategy with one that complies, or
2. Provide the justification as a supplement to the current investment strategy.

In most situations, the additional information will cover what’s needed is required for compliance purposes and describe how the trustees meet the requirements of the legislation.

Because the investment strategy of each fund is different and the reasons for the strategy depend on many factors a standard paragraph or two is unlikely to be satisfactory.  Let’s look at statements which could meet the bill for the member’s insurance needs.

The requirement for the trustees to consider a member’s insurance needs as part of the fund’s investment strategy is a relatively new development. However, the trustees are required to consider whether the fund should hold insurance policies that provide cover for one or more fund members.

There is some debate about whether the audit of the fund should consider external factors when the trustees provide justification for their decision. I think you must conclude that consideration by the trustees looks at the member’s overall situation. In some cases a member will have insurance in another superannuation fund or may have taken out insurance in their own names many years ago. If this is the case, the trustee would be obliged to take this factor into account when justifying the level of insurance required, if any. Other factors would include the age and health of the member, their age, the cost of the cover and the type of cover permitted to be held by an SMSF.

An example of an investment strategy wording that would NOT be satisfactory could merely say:

‘the trustees have considered the member’s insurance needs and have decided to take no further action’.

This is inadequate because there is no justification concerning the decision of the trustees.

However, a statement in the investment strategy which says:

‘the trustees have considered whether it is reasonable to hold contracts of insurance on the lives of one or more members of the fund.  In that regard, the trustees have considered the personal circumstances of the relevant member including:

• their age.
• likelihood of the member being covered at a reasonable cost.
• whether they have insurance in another superannuation fund or held personally.
• the level of cover held externally to the fund; and
• other impacts on the fund holding life, total and temporary disability insurance within the fund.

While the trustees may have obtained details of each member’s circumstances, it is considered these are not required to be included in the investment strategy but retained in the fund’s records in case of a challenge in future.

When it comes to the other requirements of the fund’s investment strategy such as:

• the fund’s objectives.
• the investment risks.
• return on investments.
• diversification of assets.
• cash flow.
• Liquidity; and
• the ability of the fund to discharge existing and prospective liabilities.

Then a similar process to that used for the member’s insurance needs should be adopted.  This should ensure a smooth trip when the investment strategy is reviewed by the fund’s auditor or if the ATO were to come knocking on the trustee’s door.

Important: 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. Consider the appropriateness of the information in regard to your circumstances.