Navigating key compliance issues SMSFs face under ATO’s investment strategy change

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.”