A reprieve to review your SMSF strategy

05 May 2020 | Retirement and superannuation


In the midst of the COVID-19 outbreak, the Australian Tax Office has given the majority of self-managed super fund (SMSF) trustees a short regulatory reprieve.

Most SMSFs were required to lodge their 2018-19 annual tax return by 15 May this year, however the ATO has now given trustees a six-week lodgement extension to 30 June because of the various impacts of COVID-19.

And this short extension comes at an opportune time, because of recent events on investment markets.

A significant market correction is certainly just cause for a strategy review, and all trustees are required to do a review at least annually anyway under superannuation law.

Investment strategies shouldn't change markedly from year to year. In fact, every investor should always be setting long-term investment goals based on their financial needs and risk tolerance, irrespective of whether they invest through an SMSF structure or outside of superannuation.

The purpose of every SMSF investment strategy review is to ensure the fund continues to meet the current and future needs of all members, depending on their personal circumstances.

Tougher investment strategy guidelines

In late February, coincidentally at the same time as global financial markets began to tumble, the ATO released new guidance for SMSF trustees around what should be included in an investment strategy.

Up until now, some trustees have kept their investment strategy extremely broad by simply specifying investment allocation ranges from zero to 100 per cent for each class of investment they intend to hold within the fund.

The ATO has deemed this to be an invalid approach, and requires trustees to clearly articulate in writing how they plan to invest their super or why trustees may require broad ranges to achieve their investment goals to satisfy the fund's investment strategy requirements.

"The percentage or dollar allocation of the fund's assets invested in each class of investment should support and reflect your articulated investment approach towards achieving your retirement goals," the ATO states in its investment strategy guidelines.

"If you choose not to use allocated portions or percentages in your investment strategy, you should ensure material assets are listed in your investment strategy. You should also include the reasons why investing in those assets will achieve your retirement goals."

The ATO is also putting a spotlight on SMSFs which have too much concentration risk, for example funds that are predominantly invested in a single asset such as a property or just one asset class such as shares.

Trustees must justify their lack of diversification and how they believe this will achieve their overall investment goals.

"Investing the predominant share of your retirement savings in one asset or asset class can lead to concentration risk," the ATO notes.

"In this situation, your investment strategy should document that you considered the risks associated with a lack of diversification. It should include how you still think the investment will meet your fund's investment objectives including your fund's return objectives and cash flow requirements."

Giving the investment strategy effect

The superannuation law requires trustees to formulate and regularly review a fund's investment strategy, and to ensure all investments made are in line with the retirement savings strategy.

The investment strategy also needs to align with the SMSF's trust deed, and any changes must be fully documented and reviewed by the fund's auditor as part of the fund's annual compliance obligations prior to lodgement with the ATO.

An auditor who considers a trustee has not complied with investment strategy reporting requirements must identify a breach has been committed and lodge an auditor contravention report with the ATO.

If a breach is not rectified, a penalty of $4,200 (indexed every 1 July) can be applied on each individual trustee or the corporate trustee for a breach of the investment strategy requirements. The directors of a corporate trustee are jointly and severally liable to pay this penalty.

Seek professional advice

The sharp movements in asset classes over recent weeks are likely to have pushed many SMSF investment portfolios out of balance.

For example, as share prices have fallen, other assets may now have a significantly higher weighting in terms of the overall value of a portfolio and exacerbated concentration risk.

Any review of an SMSF investment strategy should ideally involve a licensed financial adviser to ensure the fund is on the right track in terms of meeting members' needs, including insurance needs.

However, trustees are ultimately responsible for all the fund's investment decisions and adhering to the ATO's reporting obligations.


Tony Kaye

Tony Kaye
Personal Finance Writer
Vanguard Australia