Investment Strategy: a compliance obligation for Trustees
Self Managed Superannuation Funds (SMSFs), as a concessional tax structure, are regulated by the Australian Tax Office (ATO). The trustees of SMSFs must meet specific compliance rules including the creation and regular review of an Investment Strategy.
What is an Investment Strategy?
The Investment Strategy is a written document that outlines the investment parameters trustees must abide by when making investment decisions for the fund, including:
- purpose of the Investment Strategy
- investment objectives
- asset allocation
- risks associated with the investments
- liquidity needs
- diversification considerations
- expected return
- insurance needs
- borrowing allowances
- discharge of any liabilities within the fund
The ATO does not provide a template for such a document as the document should be tailored to the requirements of the fund and needs of its members.
When is the Investment Strategy to be reviewed?
The annual audit will confirm the fund has a written Investment Strategy in place and that investment decisions were made in accordance with the document.
Your auditor will not be able to make any recommendations about acquiring, holding or disposing of any financial products. It is not the role of the auditor to make any adjustments if the investments are not in line with the Investment Strategy, as this is a duty of the trustee.
It is the role of the trustees to have written, reviewed and updated the Investment Strategy. If a new investment opportunity arises that is outside the scope of the most recent Investment Strategy, then a meeting can be held among trustees or the directors of the corporate trustee to discuss and amend the strategy.
The strategy should also be reviewed whenever significant events occur that impact the Investment Strategy and/or the investment goals of the fund, for example:
- When a member of the fund is ready to receive a pension
- When a member joins or leaves the fund
- The investments are no longer appropriate for the fund
What are the risks of a non-compliant Investment Strategy?
A series of penalties can be applied to each trustee for contraventions, depending on the severity of the issue, which may include:
- Education letter,
- Trustees to undertake an education course,
- Direction to rectify the breach, or
- An administrative penalty of $4,200 (indexed each 1 July), paid by the trustees or directors of the corporate trustee rather than by the fund.
In more serious cases, the ATO can disqualify the fund trustees, treat the fund as non-complying and apply a penalty tax rate or impose an enforceable undertaking.
Who can help write an Investment Strategy?
As with many of the SMSF trustee duties, an Investment strategy can be outsourced. Unfortunately, the ATO and your SMSF auditor will not be able to draft an Investment Strategy, as it will constitute the provision of financial advice.
An outsourced Investment Strategy can be drafted by a licensed financial adviser. If you would like assistance in writing or reviewing your Investment Strategy, please book an appointment or call 1800 376 376.
Disclaimer: * The information contained in this site is general and is not intended to serve as advice as your personal circumstances have not been considered. DPM Financial Services Group recommends you obtain personal advice concerning specific matters before making a decision.