Previously, Adam Goldstien, financial adviser at Skeggs Goldstien, had told the SMSF Association National Conference that future SMSF investment strategies need to place a greater emphasis on tailoring the strategy to a fund’s circumstances.
ASF Audits head of education Shelley Banton said there will be a number of considerations for compliance SMSFs need to make during the ATO’s investment strategy changes, as the auditor perspective is shifting when looking at the set-up of a compliant investment strategy.
“It’s the SMSF auditor’s job to review the investment strategy from a compliance perspective only,” she said.
“We don’t look at it from a qualitative point of view and we don’t judge its effectiveness whether it’s good, bad or indifferent. All we look at is no further than whether all of those definitional elements contained in Reg 4.09 are present for the fund to comply with their trustee requirements.
“Main requirements under Reg 4.09 set out the trustee obligations to formulate regular review and give effect to an investment strategy and it has to be in place before any of those investments are made and it needs to be used as a blueprint for all investment decisions by the trustee.”
Ms Banton noted that before the impacts from the Ryan Wealth Holdings Pty Ltd v Baumgartner NSWSC [1502] case and the ATO’s letter to SMSF trustees, SMSF auditors didn’t really look at the investment strategy with the same set of eyes that they do now.
“Pretty much, it was given a quick look once-over to ensure the document can contain those keywords such as risk diversification, liquidity cash flow, insurance and then the audit went on,” she said at the national conference.
“One of the main reasons for that sort of quick approach is that the majority of trustees appear to put very little thought into formulating and revising their investment strategy, and when we saw those standard templates that are being used to create those investment strategies, they were really only then getting tweaked at audit time.”
Ms Banton noted that the changes now in investment strategy will require a shifted view of setting the investment objectives to meet the retirement goals.
“While there aren’t any restrictions as to what trustees can invest in, it must be permitted by the trustee or not specifically excluded,” she said.
“It can’t be prohibited by SIS and certainly it must meet the sole purpose test, and as we’ve seen, one of the things that the ATO has reiterated is that the investment strategy has to be tailored to the circumstances of the fund.
“This may include setting up those personal details of members such as their age, their employment status and also their retirement needs, and that’s all important information because that helps shape the investment and the risk appetite of the trustees.
“Now, at the end of the day, it is a document that explains how those fund investments meet each member’s retirement needs and their objectives.
“When the ATO sent out those trustee letters, they weren’t telling them to divest themselves of those assets. They were simply telling them that where the fund lacks diversification that the investment strategy needs to document those risks associated with that lack of diversification and also include how that investment will meet the fund’s return objectives and their cash flow requirements at the end of the day.”
What the auditor is looking for
Referencing the new changes for investment strategies, Ms Banton noted one of the most common problems from an audit perspective is where those funds’ investments are outside the asset allocation ranges, which means the trustees haven’t given full effect to their investment strategy.
“Now there may be good reasons why those ranges are different such as the fund’s cashed up and ready to invest in property, but if the investment strategy states that it has a minimum 50 per cent investment in shares, for example, but if it’s all in cash, your auditor is going to ask why,” she said.
“That’s going to hold up the audit and it’s going to cause delays to completion, but if there’s a short-term reason why that asset allocation from the investment strategy ranges varies, then just state it and that will be an acceptable answer to the auditor, but it’s not a ‘get out of jail free’ response.”
Ms Banton said there needs to be a good reason from the SMSF on why that’s the case and it needs to be reasonable and cannot continue year after year.
“The reason for that is that the auditor has to document the trustee’s response, so we should either be getting a revised investment strategy or some sort of advice that when the asset allocation or the investments of the fund will be returned to meet the conditions of that original investment strategy,” she explained.
“So, from a best practice point of view, it’s probably not ideal to just embed that information in your annual minutes because you may have difficulty trying to find it in future years if there was an ATO audit.”
Although not using percentages in your investment strategy is not a requirement, Ms Banton warned that it does need to list all those material assets in the document. It also needs to include the reasons why investing in those assets will achieve the retirement goals, she said.
“So, you just can’t have cash and others where there are property, listed shares and managed funds in that investment allocation,” Ms Banton said.
“You need to list them out and also include any assets that are risky with high volatility such as digital assets and the reasons why you’re investing in them and how they are going to meet your retirement objectives in that investment strategy.”
While I run my own SMSF and I do write a specific investment strategy updated at least every 2 years, I agree with the comments of Anonymous in that bureaucracy has gone mad yet again. My SMSF includes myself and my wife who are still together. I doubt I’ll let my two kids in because I unfortunately set up as two individual trustees all those years ago and can’t be bothered changing the ownership of the fund and the assets. So which 3rd party is the ATO trying to protect with this outlandish investment strategy requirement? We decide from time to time what to buy and what to sell. No one else is affected by our decisions. So why do we have to have an ATO accepted investment strategy that tries to bind us to decisions that must be made now for investments transactions that will be made in the uncertain future? The example of setting 50% shares but then finding yourself 70% in cash, in our case, because you’ve rapidly sold shares as COVID started – is this really an issue when the affected persons make the decision and no one else is affected? Are you allowed to quickly write a new investment strategy saying 70% cash is good? Do you have to back date it? Can you back date it? And what I hate the most about the ATO proposals is that they provide an “out” clause. Write your strategy and don’t deviate from it without good reasons. However, you can change your strategy any time.So again, what’s the point? Instead of a strategy that lasts me 2 years, do I have to write a new strategy every time I buy or sell something outside the current strategy? If we are allowed to change our strategy at will, then what is the purpose of this whole time-consuming regulation that tries to bind our decisions to our strategy? Is it so we can’t sue ourselves for not achieving the returns we’ve set out in our strategy? Seriously?
Couldn’t agree more.
I have worked as an administrator and accountant dealing with SMSF for several years. I attest that investment strategy is a waste of our resources as it is a pointless thing. The real reason for that is things are changing all the time and it is not possible to keep up with it accurately. The ATO (and the Government) should drop this business as it is easy for them to sit on their butts just to look at the documents and we are wasting our time and resources preparing it to satisfy their gratification!
No one including the ATO actually cares.
Just set up, download off internet, a basic 2 page investment strategy.
Have broad asset allocations section, eg Aussie share from 0 – 60% and then at least once a year update the date for the current year at start of document and say what your actual % of Aussie shares was at that time, eg, 42%, etc. Have the actual % in a column next to broad range %.
List the basic goals and objectives, alter if needed annually.
It’s just a basic compliance document that is part of having an SMSF but really as long as it exists, is dated each year, has basic Asset allocation, then no one will really care much more. Not hard folks, just do it.
Or go to Industry Super :- )
I think the whole point of this article is that the ATO is no longer satisfied with this approach and wants more specific and possibly [u]more enforcable[/u] strategies to bind the trustees that wrote it.
The ATO wouldn’t know the difference between a good or bad investment strategy so it’s just a paper exercise pushed by Industry Super and their ATO buddies to make SMSF life harder.
And Accountants or Auditors also can’t make investment judgement, they are ticking a box it exists and seems to have some of the needed content.
Only the trustee or an adviser can comment or really make a difference.
Let SMSF do what they signed up to do. Not be run by some ATO Govt morons.
When have you ever seen a client produce a written investment strategy? I wish they did, but it just doesn’t happen.
The Cooper Review of Superannuation found that compelling written investment strategies by SMSFs was a pointless exercise and recommended that they be abolished. And now as a bloated over-staffed ATO scrambles to find more irrelevant things to do, they focus in on SMSF investment strategies.
Investment strategy regulation was born from some misguided Treasury aspiration to make SMSF trustees take their role more seriously. If they were truly serious about compelling diversification, the Government would legislate fixed asset allocations as was done decades ago.
So now accountants and SMSF advisers are compelled to assist clients to beef up their written strategies with more contrived motherhood statements, just to placate the ATO. Yet they will still invest in the same things.
As much as we would all like it to happen, mum & dad trustees don’t sit around the kitchen table discussing and documenting their considerations or risk and diversification. Trying to compel them to do so is a fruitless exercise.
So advisers will continue to draft meaningless paragraphs and minutes just so the ATO minders can sleep well at night? Perhaps we should add coffee stains to make it look like a bonafide kitchen table strategy eh?
You mean wine stains.
Can you please show the reference from the Cooper Review in relation to investment strategy?
A 30 second google result:
12.4 Investment strategies
Submissions reflected contrasting views about the importance of requiring that an SMSF’s
investment strategy be recorded in writing. While the Panel recognises the importance of a strategy,
it also recognises that for 423,000 SMSFs, there will be great variations in SMSF investments and
trustee investment knowledge, which a ‘template’ approach will not address. Some trustees would
gain little or no benefit from having their strategy reduced to writing, while others might gain
something from the experience. [b]While the Panel believes that it is desirable for investment
strategies to be in writing, it is not recommending that it be mandated. [/b]
The Panel does, however, believe there is value in providing guidance and tools to assist trustees in
this area and has discussed this in section 9.4.
[url=http://https://treasury.gov.au/sites/default/files/2019-03/R2009-001_Final_Report_Part_2_Chapter_8.pdf][/url]
As a retired SMSF Adviser SSA, when in private practice we built from the ground up such Investment Strategies. The problems we faced were threefold and as you can guess these problems stemmed mainly from Accounts to the SMSF. Firstly the majority of accounts we came across looked upon an SMSF as a “Tax Dodge” Secondly they treated them as a simple “Trust” i.e. just like a family trust, lastly they scoffed at having what one accountant describe as a long-winded piece of nonsense. Yet what Ms. Goldstine has stated is exactly what we were doing 25 years ago right up to my retirement three years ago. So there is the problem. I had one accountant use an auditor whose main task for the firm was company account audits and not SMSF’s. This accountant’s view was that being a “Specialist SMSF Auditor” was nonsense. I was thoroughly trained by Grant Abbott, thankfully, and had and have a full understanding of what was and is required to this day. I upgrade my investment strategy every year without fail and keep abreast of regulatory changes that could affect my SMSF. It is not that hard.