SMSF investment strategy scrutiny to force rethink

“Just by looking at the data from our Smarter SMSF platform, we can see just how much activity there has been with investment strategies over the last 12 or so months,” he said in a blog.

“A single-page document that replicates the operating standard is no longer acceptable and furthermore requires trustees to demonstrate how they have considered each of the requirements set out within SISR 4.09.”

Mr Dunn noted that the increasing scrutiny from regulators will require a need to enter the next phase of compliance with SMSF investment strategies: the requirement for regular review.

The ATO also makes it clear there are a number of circumstances that may warrant a review of the investment strategy, including a market correction, when a new member joins the fund or departs a fund, or when a member commences receiving a pension. This is to ensure the fund has sufficient liquid assets and cash flow to meet minimum pension payments prior to 30 June each year.

“The current approach to an investment strategy review in my view will come under much greater scrutiny moving forward, as it requires the trustees to demonstrate how they have considered all of the elements within SISR 4.09,” Mr Dunn said.

“Currently, I see many people relying upon their SMSF software to generate a paragraph that effectively replicates what the operating standard says and it goes something like: ‘the trustee has reviewed the strategy and has considered risk, liquidity, diversification, the ability to discharge fund liabilities and considering contracts of insurance. As a result, no change is required to the strategy at this time.’

“The reality with this approach is that there has been little or no demonstration as to how the trustees have considered each aspect of the operating standard, in particular areas of diversification when many funds continue to invest within a single asset or asset class.

“Furthermore, many funds will have been through an event within the past 12 months that may have triggered a need to reflect a review of the investment strategy — think market corrections, rent and/or LRBA relief etc.”

While the ATO provided important guidance on their website, QC 23320, there are a number of other resources that can be relied upon to better understand an appropriate approach towards an investment strategy review heading into the future, according to Mr Dunn.

This includes the fund’s deed, which may stipulate considerations for the trustee in preparing and monitoring the fund’s investment strategy. Furthermore, there is also ASIC’s guidance, in particular for advisers with REP 575 on improving the quality of advice and member experiences; and APRA’s prudential practice guidance, SPG 530, which provides assistance for RSE licensees in the formulation, implementation and ongoing management of investment strategies.

“When exploring SPG 530 in the context of SMSFs, there are a number of items that we can look to apply including the expectation to conduct at least an annual review of the key drivers of the investment strategy to ensure that it remains consistent with the investment objectives,” he said.

“Furthermore, where it is no longer appropriate to meet the investment objectives, the trustee would have a documented process in place to adjust the strategy and the particular triggers that could lead to an interim review of the investment strategy — economic events, structural change in membership profile, or material outflow of beneficiary funds.”