SMSF investment strategy set to attract auditor, ATO scrutiny

ASF Audits head of education Shelley Banton had said this was leading to a change in the auditor perspective when looking at the set-up of a compliant investment strategy.

Speaking at the Smarter SMSF Virtual Day 2021, Smarter SMSF CEO Aaron Dunn said that what is being observed is that arrangements from the ATO are clearly being made for trustees to update their existing investment strategies that either didn’t exist or were deficient.

“So, if it’s an existing fund, you can create a brand-new investment strategy report and it is prospective in the way it is being formulated because it needs to reflect the way in which the fund is moving into the future,” he said.

“Does it need to recognise the previous investment strategy? No, you are simply adopting an investment strategy for the benefit of the fund as it currently stands and where it is moving ahead to in the future.

“Now, there are circumstances in particular where we think about heavy asset concentration in the fund, we are going to need to articulate additional information around why that requirement of diversification isn’t necessarily going to be met. So, think about why the trustees of the fund have decided to have 80–90 per cent or more invested in a single asset or single asset class.

“Now, this may be articulated in the investment strategy itself, it may also form part of some additional trustee minutes that resolve that the trustees are satisfied to continue down this path and evidence the reasons why it actually meets the retirement objectives.”

Mr Dunn said these new focuses are one of the reasons why auditors are going to ask more questions to satisfy themselves and that increased level of activity will mean there will be more issues being raised in management letters.

“Ultimately, this is all leading to the auditors saying we need to better manage our own risk, so in terms of what we’re required to report to the ATO,” Mr Dunn explained.

“You know auditors have their own audit, the auditor program, so the ATO spends a lot more time in their jurisdiction looking at the quality of work that is being done by auditors, let alone the fact that there is trustee recovery risk that was seen in the McGoldrick and Baumgartner cases.

“So, auditors here certainly heightened the amount of work that they’re doing to be satisfied in their own right around that the fund has an investment strategy in place, whether it has considered all the requirements within SIS regulation 4.09 and is obviously maintaining the necessary asset allocations or investments in accordance with that SMSF investment strategy.”

The other factor is that the auditor will look more closely at the fund’s investment strategy during that relevant financial year in accordance with the set strategy, according to Mr Dunn.

This would mean looking at the ranges in place by percentage or dollar amount and that they are not operating outside of those ranges or that if there was heavy asset concentration, that the investment strategy has listed those material assets inside that report.

The final requirement that will be closely looked at, Mr Dunn noted, is to ensure that the strategy has been reviewed and this concept of regularly reviewed sits within reg 4.09, so the review concept needs to ensure that it’s been done at some stage during that relevant financial year.

“So, it’s not necessarily once a year, but it needs to have been done, so in the context of the last 12 months where there may have been a multiple number of times where the strategy has been reviewed,” Mr Dunn said.

“If we go back to March 2020 when COVID hit, you may have had a number of clients that have then been impacted by cash flow in the fund, whether there was any review that needed to be considered there around the pensions along with the contributions that may have come in subject to the levels of income that may have been generated.

“There are a number of things that should trigger in that regard a review of the investment strategy at that point in time. In addition, there may then be, as part of the annual compliance requirements, a review that occurs there as well.”

Mr Dunn said this is the shift that he is beginning to see happening in the future where there will be changes in review processes.

“At the moment, in our annual trustee minutes that might get produced out of our BGL or Class software is that, ‘yes, the trustees reviewed the investment strategy and they’re satisfied that there’s no changes,” he explained.

“Well, the reality is during the year, there may have been a number of circumstances that have resulted in the fact that the trustees did need to reconsider cash flow and reconsider how that they were investing in the funds.

“So, there’s going to be a greater focus as the auditors are going to need to understand and be requesting this information on how that review process has actually been undertaken by the trustees.

“When we were setting up these investment strategies previously, we had this single, one-page document that may have had ranges of 0–100; we are going to see a shift around the review process as well because the quality of document not only has to be in the initial strategy but the evidence that we need to show that it’s been regularly reviewed and appropriately to satisfy that auditor.

“So, in my view, I think it is going to only be heightened over the next couple of years as well, so making sure you’ve got all that information and your ducks lined up is critically important.”