With the ATO’s recent approach to investment strategies requiring SMSFs to be increasingly compliant, there is also a changing effect for auditors when looking at the set-up of a compliant investment strategy.
Speaking at a recent Topdocs strategy update, ASF Audits head of education Shelley Banton said with the new auditor independence standards coming into effect on 1 July 2021, this combination will require greater considerations on how the new auditor is going to be looking at the SMSF investment strategies.
“It doesn’t matter whether you’re entering into a new audit pooling arrangement, going into some type of newly set up compliant reciprocal arrangement or you’re using an independent auditor for the first time — those investment strategies can be looked at in a different light depending on what the previous auditor did,” Ms Banton said.
“While that may sound a bit weird, we know if you get 10 different auditors in a room, you’re going to get 10 different answers.
“Once there is a change in the auditor, the first thing advisers need to consider is whether the investment strategy actually complies with Reg 4.09 in all of those key compliance areas or does it simply recur to take the legislation because, if it’s the latter, then there’s certainly some work that needs to be done.”
Ms Banton recommended that it’s better to be proactive and have a conversation with your SMSF auditor up front rather than waiting for audit queries to come through. This can be addressed on an entire basis of the fund’s strategy and can be a better approach when considering if the audit is going to be held up at the end of the day.
Another area to consider is insurance where the requirement for trustees to consider insurance was introduced back in 2012.
“Now this is something which is typically just considered in the annual minutes in each year because that is what comes through the SMSF administration software, so you may need to do a little bit more work. Think about if there is actually a specific addendum to the investment strategy which was developed at that time or is it actually included in the body of the investment strategy,” she said.
“It’s an aspect to consider because SMSF auditors will be looking more closely at this and it’s going to hold up the audit.”
With a fresh audit perspective, there are also new considerations that will be looked at when there has been a change in investments and if that is correctly reflected in that investment strategy, according to Ms Banton. Changes will also be seen when looking at how those asset allocations and benchmarks have been applied.
“In this case, think about if these areas match, and have the trustees actually invested the fund’s assets in the way which has been directed by the investment strategy so that it’s actually compliant?” she said.
“Let’s also not forget about non-standard assets. Have the trustees invested in derivatives, for example, and is there a derivative management statement in place? Think about if they have also invested in business real property, LRBAs or related unit trusts, and are the activities of the fund justified in giving effect to the investment strategy?
“Once again, all these are definitional elements of Reg 4.09 being considered in relation to these non-standard assets.”
At the end of the day, Ms Banton said SMSFs need to make sure the investments are appropriate to the retirement needs of the member and the full circumstances of the fund.
“These are the types of things that are going to be looked at and reviewed potentially with a fresh set of eyes for the first time,” she said.
“There are a lot of questions that need to be answered not only in this area of compliance but obviously across the board with the new SMSF auditor, and once again, you may be better off having an upfront conversation to reduce any delays in completing your audits.”
Thank you Michael & Kym for the tips. Many of SMSF would not want to pay so much money on proper investment strategy. The cost of yearly accounting fee and audit fee are already quite high and now they need to pay for investment strategy too. It seems that the SMSF fees are making the member balance reduce quickly especially for those whose balance is reducing due to pension payments being taken each year.
The best approach is to keep the investment strategy broad and don’t use asset allocation benchmarks. The Regulations were never designed for SMSFs, they are targeting APRA funds that have a complex investment process often including mandates and performance hurdles. Asset allocation models is the stock of trade of professional investment managers but are often quite opaque to the ordinary SMSF trustee.
Even SMSFs that do have an investment adviser that implements an asset allocation portfolio construction methodology, should consider whether they need to be copying that into the IS each and every year.
The best approach to SMSF IS design is for the trustee to determine the fund objective and it is here that a “measurable” can be included such as a retirement age; age 65 or 10 years for example.
The Objective informs the strategy – what is going to be done to work toward achieving that objective?
Too many SMSF IS’s launch straight into the ‘strategy’ but miss the 1st step of formulating an investment objective. And then stipulating asset allocation ranges but rarely explaining ‘how does allocating 60% to equities achieve your objective of XZY?
TIP: avoid ranges and think carefully about the objective, the timeframe you are planning on achieving that objective within and, how will you invest to get there.
Write the story but don’t forget to put in a measurable so it isn’t too vague and lacking in accountability.
Again with insurance needs – members need to understand their balance sheet strength and decide whether they can carry the financial impact of unforeseen health events or an early death or, whether they need to outsource via insurance. The Regs say the Trustee needs to consider the insurance needs – sure, in APRA funds but as for SMSFs, they are member led and the IS should record the result of the member instruction to the trustee.
Auditors can’t tell SMSF trustees how to write the IS but, if you set yourself up by providing a document that doesn’t tell the story of your actual investment plan, you are going to get audit queries or, even worse ATO review.
If you need convincing, have a look at why the founder of Billabong’s SMSF is facing disqualification proceedings: Merchant and Commissioner of Taxation [2021] AATA 915 (19 April 2021)
Or simply accept that the member/trustee has signed off the investment strategy and then made decisions to invest/insure on their own behalf.
Unless the investment strategy and actions by the trustee/ members are irreconcilable auditor’s should not be seeking to invade the financial planning space when not qualified and/or
engaged to do so.
Of course that won’t justify more fees for auditors. Nanny state and vested interest fee generation. Who would have thought?
Would be nice to think that Michael but nobody has told the courts that the SMSF auditors are “not qualified and/or engaged to do so”
There has been no court cases related this issue. You are jumping at shadows