Legislative changes mean investment strategy reviews are even more important, says professional

“We need to continue to satisfy the auditor that there has been a process of regular review of investment strategies,” Mr Dunn said.

“And where we’ve got thresholds above $3 million, we’re going to need to think about how the fund is going to be investing moving forward not because a member might be leaving the fund, but because there may be adjustments being made to balances of those members, and monies being moved around or out of the fund.”

Mr Dunn said the ATO’s operating standards emphasise the importance of diversification in investments within an SMSF.

“And while it was never the ATO’s intention to tell trustees and members how they can invest within a self-managed super fund, we do have very clear and distinct requirements as to how a fund will comply with the operating standard,” he said.

The ATO has more recently issued detailed guidance around what its expectations are in terms of behaviour of the trustee for investment strategies and what auditors need to consider.

“This gives effect to a fund’s investment strategy to help the members ensure that they’re meeting their retirement objectives,” he said.

He continued that reviewing an SMSF’s investment strategy has become more central to the ATO’s compliance approach.

According to Mr Dunn, statistically in 2019–2020, more than 40 per cent of funds had single asset exposure.

This meant it was important for trustees to demonstrate their investment strategy was aligned with helping fund their retirement, and that a more diversified basket of assets was not required.

“From a financial planning context, advisers may say we need to look more broadly at the individual’s overall circumstances - what they hold inside and outside of super,” Mr Dunn said.

“However, what the SIS laws are looking at specifically is the asset mix inside the fund, and therefore we need to ensure that we’re documenting what those decisions ultimately look like for the benefit of the members.”

Mr Dunn also highlighted the requirement to perform an annual review of the fund’s investment strategy to make sure that any changes have been documented.

“The ATO’s expectation is that once you do an investment strategy document, it is simply not set and forget,” he said.

“There is a very distinct requirement to regularly review [the investment strategy] to ensure the trustees are continuing to assess and make changes where necessary around the current and future needs of the fund’s members, and giving consideration to their own personal circumstances.”

However, he noted that there are instances where a fund’s investment strategy should be reviewed above and beyond the annual compliance function.

“There are significant events that might occur during the year and this is where the ATO expects the trustee to have gone back and actually reviewed their investment strategy,” he added.

“These could be around market corrections, and it may not just be around share prices but also in respect to property, including things like rent relief or other things that significantly change the dynamic of the way in which the fund has invested and therefore the returns they’re getting.”

Mr Dunn explained that a review also needed to be done if members enter or leave a fund.

Finally, he stressed the ATO’s focus on changes in the life cycles.

“For instance, where a member may have commenced an income stream which will have to consider liquidity and cash flow to ensure the fund can meet those pension obligations or other benefit payments as and when they fall due,” Mr Dunn said.

He concluded that the ATO requires auditors to obtain written confirmation from the trustees to ensure they have met the compliance requirements.