Regulation 4.09 of the SIS Act obliges all SMSF trustees to formulate and document an investment strategy, noted TAL’s national technical manager, David Glen.
There is an “express requirement” in regulation 4.09 that trustees consider both liquidity and debt, Mr Glen said.
“Unfortunately, my experience has been that in the SMSF context, compliance with those items of regulation 4.09 are the exception rather than the rule,” he said.
“So we need to make sure that our clients – forgetting about need to manage risk, but purely from a pure compliance point of view – need to document and need to cover debt and liquidity in their investment strategy documentation."
He also noted that while SMSF trustees are not obliged to take out life insurance, they are required to consider it.
“If a trustee fails to, for example, consider disability insurance, and a member of that SMSF suffers a stroke and is incapacitated as a result of that stroke, what that member could do is the member could sue the trustees, because they’ve failed to consider the insurance needs,” Mr Glen said.
“You might say that’s a not a problem because the trustees would be suing themselves. That’s not strictly speaking correct, because what will happen is that all trustees will be sued, including the other trustees who have not suffered from that incapacity. So we need to be very careful of that risk,” he said.
More generally speaking, Mr Glen stressed the importance of risk mitigation strategies in SMSFs is “particularly great” given SMSFs are being increasingly used to hold both debt and illiquid assets.
When looking at risk mitigation strategies, it is imperative to understand a client’s domestic situation.
“Take a step back and think: what are you trying to do here? You’re trying to preserve a client’s lifestyle. So unless you know what their domestic situation is, and unless you know what their aspirations are, you’re not going to be able to really put in place any effective strategies in order preserve their lifestyle,” Mr Glen said.