The changes to valuations in SMSF trustee portfolios as a result of the COVID-19 outbreak marks an appropriate time to review their investment strategy.
A review of the investment strategy document in this context does not need a complete rewrite.
Nicholas Ali, executive manager of SMSF technical support at SuperConcepts, says: “It could be done as part of the annual trustee minutes, which could then be provided to the fund auditor to show the trustees have met the requirement to review regularly and, where necessary, revise the investment strategy.”
The Australian Taxation Office (ATO) recently released guidance on SMSF investment strategy reporting to discourage trustees from repeating the wording of superannuation legislation in the document, which is what happens in a lot of cases now.
Ali says: “The investment strategy should be tailored to individual fund circumstances and should not be a document merely repeating standard verbiage.
“Each fund member has a unique set of circumstances and given that the sole purpose of superannuation is the provision of retirement benefits, the investment strategy should explain how fund assets will meet each member’s retirement goals.”
The superannuation laws mandate that trustees include specific factors in their strategy, including risk profile, the composition of investments, liquidity of the fund’s assets, the fund’s ability to pay benefits and whether to hold insurance cover.
Despite this, a lot of trustees are not doing enough with their strategy which can be detrimental to their retirement savings.
When it comes to the composition of investments, the ATO stresses that trustees cannot simply specify investment ranges of zero-to-100 per cent for each asset class.
Instead, trustees need to specify the following: “The percentage or dollar allocation of the fund’s assets invested in each class of investment should support and reflect your articulated investment approach towards achieving your retirement goals,” the ATO says.
Ali says: “Whilst we at SuperConcepts rarely see trustees put together such generic asset class ranges, it appears the strategy of using broad template ranges to ensure the investment strategy covers almost every fund asset allocation without much member input is a thing of the past.”
For those trustees who choose not to use allocated percentages in their strategy, material assets need to be listed as well as the reasons as to why these will achieve their retirement goals.
Despite this, Ali notes that there is nothing in the legislation that states trustees must use asset allocation ranges.
The ATO warns trustees that hold one asset in their fund to be aware of the legal risks associated with it. The investment must be in the best interest of all members.
In this case, the strategy should document that the risks associated with a lack of diversification have been considered.
The ATO says: “It should include how you still think the investment will meet your fund’s investment objectives including your fund’s return objectives and cash flow requirements.”
If trustees are considering longevity risk or the need for capital growth, Ali says they may in fact state in the investment strategy that they take short-term tactical asset allocation decisions that differ markedly from the longer-term strategic asset allocation position of the fund.
“Tactical Asset Allocation ranges, even 90 per cent in one asset class, will not be an issue for the ATO. It always comes back to a requirement to justify the decision. If trustees can do that, the ATO in my view would not be concerned at all,” Ali says.
Upon the annual audit, the auditor will check the investments were aligned with the strategy and that the strategy was reviewed within the financial year.
In the event that the strategy is not compliant with the requirements, the auditor may lodge a contravention report.
However, failure to address factors such as the risk of a lack of diversification can be remedied by attaching a signed and dated addendum to the strategy or a trustee minute which adequately addresses the requirements.
If the investment breaches the super laws, the ATO can apply penalties and potentially disqualify the trustee.