You need to manage your fund’s investments in the best financial interests of fund members and in accordance with the law. You also need to ensure that you separate your fund's investments from the personal and business affairs of fund members, including your own.
Your investment strategy is your plan for making, holding and realising assets consistent with your investment objectives and retirement goals. It should set out why and how you’ve chosen to invest your retirement benefits to meet these goals.
The super laws require that you must:
Your SMSF investment strategy should be in writing and be tailored and specific to your fund's circumstances. It should not be a repeat of the legislation.
It should explain how your investments meet each member’s retirement objectives. Relevant circumstances of the members may include (but are not limited to) their:
Under the super laws, your strategy must consider the following specific factors regarding the whole circumstances of your fund:
When formulating your investment strategy, it is not a valid approach to merely specify investment ranges of 0 to 100% for each class of investment. You also need to articulate:
The percentage or dollar allocation of the fund’s assets invested in each asset class should support and reflect your articulated investment approach towards achieving your retirement goals. If you choose not to use allocated portions or percentages in your strategy, you must list material assets. Also include the reasons why investing in those assets will achieve your retirement goals.
You are free to choose what type of assets you invest in, providing those investments:
For instance, be aware of the:
Where your investments breach the super laws, the ATO can take compliance action against you. Depending on the severity of the breach, the ATO may apply penalties and potentially disqualify you as trustee.
While you can choose to invest all your retirement savings in one asset or asset class, risks such as return, volatility and liquidity can be minimised if you invest in a variety of assets. This is called a diversified portfolio which helps to spread investment risk.
Investing the predominant share of your retirement savings in one asset or asset class can lead to concentration risk. In this situation, your strategy should document:
Asset concentration risk is heightened in highly leveraged funds, such as where the trustee has used a limited recourse borrowing arrangement to acquire the asset. This can expose you to a loss in your retirement savings if the asset declines in value. It could also trigger a forced asset sale if loan covenants (for example, the loan to valuation ratio) are breached.
Super laws also require you to invest in accordance with the best financial interest of all members. You need to be aware of any legal risks that may result from investing in one asset class.
The super laws require that you as trustee must formulate and regularly review your fund’s investment strategy. You must also give effect to an investment strategy that has regard to the whole of the fund’s circumstances.
This means ensuring your fund’s investments are in accordance with your investment strategy so that you are on track to meet your retirement goals. To help meet this requirement, you could consider specifying appropriate allocations, percentages or dollar ranges for each class of investment. This typically allow some flexibility for market fluctuations.
However, broad investment ranges between 0% to 100% in a broad range of assets do not reflect proper consideration in satisfying the strategy requirements. Your strategy must articulate how you plan to invest your super to meet your retirement goals.
The ATO don't consider that short term variations to your articulated investment approach, including to specified asset allocations, constitute a variation from the investment strategy.
Your investment strategy should not be a ‘set and forget’ document. Review it regularly to ensure it continues to meet the current and future needs of your members depending on their personal circumstances.
Certain significant events should also prompt you to review your strategy, such as:
Review your strategy at least annually and document that you have undertaken this review and any decisions made arising from the review.
For example, you could do this as part of the annual trustee meeting minutes. Provide these minutes or other evidence of a review to your auditor. This shows that you met the requirement to review regularly and, where necessary, revised your investment strategy.
When conducting the annual audit on your fund, your auditor will check whether it meets the investment strategy requirements under the super laws for the relevant financial year. This means they will check that your:
Where you don’t comply with the investment strategy requirements, your auditor may need to notify the ATO about this by lodging an auditor contravention report (ACR).
If your auditor identifies that you have breached the investment strategy requirements, then you should fix the breach.
If your strategy failed to adequately address some of the factors mentioned above, such as the risk of inadequate diversification, fix this by attaching a:
Show this to your auditor before the audit is finalised.
If you failed to invest in accordance with your strategy, revise it to ensure it reflects your fund’s investments and how they will meet your retirement objectives. Then make sure you regularly review and adhere to your new strategy in the future.
Your auditor only needs to lodge an ACR notifying the ATO of the breach if it meets the ACR reporting criteria. For most funds, the criteria will be met if either:
However, the criteria may also be met if the fund is less than 15 months old and the value of any single breach exceeds $2,000.
If your auditor is required to lodge an ACR and the breach has not been rectified, the ATO will ask you to rectify it.
A penalty can be applied on each individual trustee or the corporate trustee for a breach of the investment strategy requirements. The directors of a corporate trustee are jointly and severally liable to pay this penalty.
The ATO cannot help you prepare your SMSF investment strategy as this could amount to the provision of financial advice. If you need help, reach out to your usual SMSF adviser or a licensed financial adviser.
Note that your usual adviser may not be a licensed financial adviser and legally capable of assisting you. They may be able to guide you on where to find resources such as an investment strategy template.
Take care with standard investment strategy templates because they:
Your SMSF needs to meet the sole purpose test to be eligible for the tax concessions normally available to super funds. This means your fund needs to be maintained for the sole purpose of providing retirement benefits to your members, or to their dependants if a member dies before retirement.
Contravening the sole purpose test is very serious. In addition to the fund losing its concessional tax treatment, trustees could face civil and criminal penalties.
It’s likely your fund will not meet the sole purpose test if you or anyone else, directly or indirectly, obtains a financial benefit when making investment decisions and arrangements (other than increasing the return to your fund).
When investing in collectables such as art or wine, you need to make sure that SMSF members don’t have use of, or access to, the assets of the SMSF.
Your fund fails the sole purpose test if it provides a pre-retirement benefit to someone – for example, personal use of a fund asset.
You need to manage your fund’s investments separately from the personal or business investments of members, including your own. This includes ensuring the fund has clear ownership of its investment assets.
To protect fund assets in the event of a creditor dispute, and prevent costly legal action to prove who owns them, assets should be recorded in a way that:
Fund assets (other than money) should be held in the name of either:
The assets can't be held in the name of a trustee or a member as an individual. Nor can they be held by a standard employer-sponsor or their associate.
In some circumstances, assets of the fund can be leased to a related party of your fund, such as business real property and in-house assets. There are restrictions on the types of assets your fund can invest in. It’s a good idea to speak to an SMSF professionals to make sure your investments comply with the law.
The easiest way to comply with the ownership rules is for your fund to have a company set up solely for the purposes of being the corporate trustee of the fund.
If there is a change in directors of the company, you don't have to change the name on the ownership documents for each fund asset as the trustee of the fund has not changed. A separate corporate trustee reduces the chance of personal assets becoming intermingled with fund assets.
If an individual trustee joins or leaves your SMSF you must change the names on the ownership documents (such as a title deed) for each fund asset. Document this change in your records, along with clear evidence to support the fund's ownership of the asset.
Some systems, such as some share trading accounts, will not allow more than three names to be recorded on the online share application form as trustees of a super account. If there are four trustees, document the names of all individual trustees in your fund's records as owners of the shares.
An unavoidable restriction (such as state law) may prevent your SMSF from holding assets using the fund's name.
If assets cannot be held in the fund's name, ownership by the fund must be clearly established. You can do this by executing a caveat or creating an instrument or declaration of trust to enable the fund to assert its ownership.
If possible, documents such as sale agreements should be executed in the name of the trustees 'as trustees for' the fund.
If you enter into a limited recourse borrowing arrangement, ensure correct asset ownership before and after transfer of the trust asset.
All investments by your SMSF must be made on a commercial ‘arm’s length’ basis. The purchase and sale price of fund assets should always reflect true market value, and the income from fund assets should always reflect a true market rate of return.
Generally:
If you don't comply with the investment restrictions the ATO may impose significant penalties, including disqualifying you as a trustee and even prosecution. It's a good idea to speak to an SMSF professional to make sure your investments comply with the law.
Self-managed super funds (SMSFs) are not prohibited from carrying on a business, but the business must be:
The rules governing SMSFs prohibit or limit some activities available to other businesses, such as entering into credit arrangements or having overdrafts. You should get professional advice before carrying on a business through your SMSF.
If the trustee of an SMSF carries on a business, the ATO examine the activities closely to ensure the sole purpose test is not breached. Cases that attract the ATO’s attention include those where:
As a trustee, ensure a business conducted through your SMSF complies with investment rules and restrictions applying to SMSFs.
Your investment strategy – the nature of the business activities and the way they are conducted must be in accordance with the SMSF's investment strategy.
Restrictions on investments – all investments by your SMSF must be made on a commercial 'arm's length' basis. If you don't comply with the investment restrictions, penalties could apply.
Loans and financial assistance – the business activities must not involve:
Acquiring assets from related parties – purchasing assets (such as plant and equipment) for use in business activities from a member or other related party could contravene the related party acquisition rules.
Borrowing – drawing on a bank overdraft or margin lending account to fund the business activities could contravene the borrowing restrictions. Borrowing money and placing a mortgage on an asset would contravene the borrowing and charge-over assets restrictions.
Arm's length dealings – employing a member, or relative of a member, in the business at a salary higher than an arm's length rate could contravene the arm's length provisions.
Collectables and personal use assets – these type of assets owned by the SMSF can't be displayed at the business premises.
