Being the trustee of a Self-Managed Super Fund (SMSF) comes with a lot of privileges regarding investment choice, but it also comes with responsibilities when choosing investments and setting out a framework for them. Every SMSF is required to have an investment strategy which outlines the risk profile, and the desired investment returns members would like to achieve. The strategy is tailored the individual members investment objectives.
Why an investment strategy is important:
The investment strategy is a key component of every SMSF, the strategy determines the spread of investments across different asset classes. As a result, this will determine the risk taken and the rates of return achieved by the fund. The strategy should be tailored to the member’s needs, this includes age, employment status and retirement objectives. The sole purpose of superannuation is to provide retirement benefits for members. The strategy should explain how a member will achieve those retirement through the choice of investments made.
What needs to be included?
The ATO as the regulator sets out minimum requirements that would need to be included. These requirements include:
- The level risk and likely returns from the SMSF’s investments.
- The Composition of investments. E.G 30% Australian shares, 30% international shares, 10% property, 20% Fixed interest 10% cash. Investment ranges from 0-100% are not acceptable.
- Diversification of assets has become a bigger focus of ATO audits lately: Different asset classes perform differently at different points in time. Diversification reduces volatility and ensures a more constant rate of return. It avoids over concentration in one asset class and can results in the member not achieving their retirement goals.
- Liquidity of the assets, this ties in with the members needs and will change over time. Younger members might be more comfortable with investments in illiquid assets, whereas older members will be more focused on the cashflow and the ability to make regular pension payments.
- Details of Life & Total and Permanent Disability cover held by members.
SMSF provide flexibility to investors to take control of their super. The investment ranges of a SMSF are more extensive than for any other super fund. There are very little restrictions around the investment choices of SMSF Trustees. SMSFs can invest in speculative stocks (small caps), unlisted / private equity, art, commodities i.e. diamonds, physical gold / silver, crypto currencies and real property.
There are some pitfalls SMSF Trustees need to be aware of when deciding to invest:
- The asset needs to be permitted under the deed of the Fund
- Are asset is not prohibited by super laws
- Need to meet the sole purpose test:
- The Sole purpose test which is outlined in section 62 of the SIS Act requires that the superannuation fund is maintained only for the purpose of providing benefits to its members upon their retirement, or for beneficiaries if a member passes away.
- This means that if an asset provides a pre-retirement benefit the test fails. For example, art owned in the fund and displayed.
What happens if the strategy I non-compliant?
SMSF are required to be audited on an annual basis. If the strategy fails to address the above points, there is a risk of the fund failing the audit and becoming non-compliant. This could mean penalties from the ATO.
If the trustee has failed to invest in line with the strategy, there is a risk that the members will not achieve their retirement objectives.
Who can help to keep an investment strategy up to date and relevant?
SMSF as a vehicle are very complex structures and to maximise the benefits and administer the structure properly professional advice is required. Get in touch with our Wealth Management experts and find out more.