If you established a self-managed superannuation fund (SMSF) or helped set-up one, you must keep in mind that being a trustee entails responsibilities involving management of the fund’s investment.
The Superannuation Industry (Supervision) Act of 1993 — also known as the SIS Act or super laws — states that trustees are responsible for establishing an investment strategy that would ensure that the fund caters to all the members’ needs.
Establishing an investment strategy is not just a legal requirement under the super laws, it is a crucial component to help you grow your retirement savings.
Here are the things you need to know and understand about an SMSF investment strategy:
What is an SMSF investment strategy?
An SMSF investment strategy is a written document that details your plan for making, holding, and realising assets. According to the super laws, an SMSF auditor ensures the compliance of the investment strategy as part of the annual audit of the fund.
Your SMSF investment strategy also lays out the fund’s goals and the reason and manner by which you want to investment your retirement benefits to meet your goals.
What are the legal requirements of creating an SMSF investment strategy?
As a trustee of your SMSF, you will be directly accountable for the management of the fund’s investments. You will also be responsible for monitoring the performance of the investments.
An SMSF investment strategy should not be a general statement of the fund’s intentions — it must be tailored to the needs of the members and the goals of the fund.
Some of the key things you need to consider when crafting your strategy are the age, employment, and retirement needs of the members.
The following factors must also be stated and explained in detail:
- Risks – What are the potential risks of your investments and how are they appropriate at the current stage of the members’ lives? There is a need to assess the risks and the likely return from the investments.
- Diversification – What will be the components of the fund’s investments? It is a must to ensure the appropriate variety of asset classes to spread investment risks.
- Liquidity – What is the expected cashflow requirements of the fund? Your SMSF will need access to cash so it is able to pay administrative expenses, income tax, and minimum income stream when they are due.
- Insurance – Another important factor to consider is insurance needs of all members. It is crucial know whether to provide coverage, such as life, permanent or temporary incapacity insurance for each member. Do not forget to include the beneficiaries.
- Liabilities – Is the fund able to meet its liabilities?
The investment strategy must detail the share allocations for each asset classes the fund will plans to invest in. You must also expound on how you plan to invest and why you require broad ranges to achieve your goals.
In some cases, separate investment strategies can be designed for each member of the SMSF. This is helpful for those funds whose members have different risk profiles.
What are the rules that must be followed when investing with SMSF?
When creating your investment strategy, you are free to decide the types of assets you want to invest in. However, you must ensure that these assets are allowed by your fund’s trust deed and are not prohibited under the super laws.
Furthermore, you have to ensure that the asset meets the sole purpose test. Check out this guide to know more about the regulations surrounding SMSF investment.
If your chosen investments breach the super laws, the ATO can take a compliance action against you — you will either pay penalties or you could potentially be removed as a trustee.
When is the right time to review your SMSF investment strategy?
Your SMSF investment strategy is not set in stone — it must be regularly reviewed to ensure that it still meet the current and future needs of your members.
Typically, you must conduct a review annually — it could be part of the yearly audit of your fund.
However, there are certain events which require immediate review of the strategy, including a market correction or when there are changes to SMSF membership, such as an addition of a new member and the death, departure, or retirement of an existing member.
What is the role of the SMSF auditor in your investment strategy?
As mentioned earlier, your SMSF auditor will include checking your investment strategy as part of the annual audit of your fund.
In essence, the auditor will check three things: whether your SMSF had an investment strategy that outlines the factors such as risks, diversification, etc; the compliance of your investment to your strategy; and the whether the strategy had been reviewed at some stage during the financial year.
Any non-compliance will be notified by the ATO through an auditor contravention report.
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