The ATO has released further guidance on investment strategy requirements for trustees of self-managed superannuation funds (SMSFs). The guidance comes on the heels of ATO contacting 17,700 SMSFs in late 2019 where the SMSF annual return data indicated that they may be holding 90% or more of their retirement savings in one asset or a single asset class.
Most trustees know that every SMSF is required by law to prepare and implement an investment strategy which needs to be reviewed regularly. But what they might not know is, by law, the following specific factors must be considered in the context of the whole circumstances of the fund:
risks involved in making, holding and realising, and the likely return from your fund’s investments regarding its objectives and cash flow requirements;
composition of your fund’s investments including the extent to which they are diverse (such as investing in a range of assets and asset classes) and the risks of inadequate diversification;
liquidity of the fund’s assets (how easily they can be converted to cash to meet fund expenses such as the cost of managing the fund and income tax expenses);
fund’s ability to pay benefits (such as when members retire and require a lump sum payment or regular pension payments) and other costs it incurs; and
whether to hold insurance cover (such as life, permanent or temporary incapacity insurance) for each member of your SMSF.
It is the second point in relation to diversification that the ATO has concerns over. While it notes in the guidance that trustees can still choose to invest all their savings in one asset or one asset class (such as property or shares), where that has occurred, the trustee should document that they have considered the risks associated with the lack of diversification. In addition, trustees should also include how they still think the investment will meet the fund’s investment objectives including returns and cash flow requirements.
Your SMSF auditor should be checking during the annual audit whether your fund has met the investment strategy requirements for the relevant year. Where your SMSF does not comply with the investment strategy requirements, you can rectify that by addressing the breach before the finalisation of the audit.
For example, if your strategy failed to adequately address the risk of diversification, you can fix it by attaching a signed and dated addendum to the strategy or a trustee minute which adequately addresses the requirements and show it to your auditor before he finalises the audit.