Having an SMSF Investment Strategy for your self managed superannuation fund is a legislative requirement.
Every SMSF must have a documented investment strategy.
What is an SMSF Investment Strategy?
A SMSF trustee is required, by section 52(6) of the Superannuation Industry (Supervision) Act 1993 (SIS Act), to formulate, review regularly and give effect to an investment strategy.
The SMSF Investment Strategy must address the risks, composition, liquidity, valuations, liability management, tax, costs and any other relevant matters associated with the SMSFs investments.
Risks of Investments
The first requirement of a SMSF Investment Strategy is for the trustee to address the risks involved in making, holding and realising and likely return from the Fund’s investments, having regard to the SMSFs objectives and cash flow requirements.
Composition of Investments
Next, the composition of the SMSFs investments needs to be addressed; including the extent to which the investments are diverse or the inherent risks associated with inadequate diversification.
It is okay to not have diversification, but the risks associated with a lack of diversification need to be acknowledged and justified.
Liquidity of Investments
The SMSF Investment Strategy also needs to include discussions around the liquidity of the investments, having regard to the expected cash flow requirements of the SMSF.
For example, does the investment strategy of the SMSF provide adequate accessibility to cash to meet its ongoing costs and obligations on a regular basis, even if it has illiquid assets? And what measures are in place to protect against a lack of liquidity?
Valuation of Investments
An accurate valuation of superannuation investments is essential, because many superannuation rules and the management of superannuation as a whole, rely on accurate and up-to-date superannuation balances. Therefore, the SMSF investment strategy is required to document how the SMSF assets will be valued, as well as the regularity of such valuations.
Ability to Discharge Liabilities
A SMSF will have a number of existing and prospective liabilities that are not simply limited to debt facilities.
The investment strategy will need to detail how any SMSF loan repayments will be met on an ongoing basis until the loan is completely repaid; but, it will also need to explain how other liabilities such as pension payments, instalment payments, and other outgoings will be met from the SMSFs investments.
The SMSF investment strategy will also need to address the expected tax implications of holding and realising the investments of the Fund. For example, how the income, interest and distributions will be taxed; the capital gains tax consequences upon sale, as well as any other applicable taxes and general tax on super earnings.
Read more: SMSF Tax Rate
The investment strategy will need to address the costs associated with the SMSF’s investments and how these costs might be met.
Other Relevant Matters
Included within the SMSF investment strategy should be any other matters that you, in your capacity as trustee, determine to be relevant to the SMSFs portfolio of assets and overall investment strategy.
Sample SMSF Investment Strategy
A sample SMSF Investment Strategy should cover all of the SIS Act requirements for formulating, regularly reviewing and giving effect to an investment strategy.
The information below is not a comprehensive or exhaustive guide to creating an SMSF Investment Strategy. It is merely intended as a template of what could be included but may omit other requirements to be included in an Investment Strategy, based on the particular circumstances of your Fund.
There is no set structure for a SMSF Investment Strategy template, provided it covers the information above.
Page 1: Title Page
Name of the SMSF, title of the document, date.
E.g. Investment Strategy for the SuperGuy Superannuation Fund. 1 July 2023.
Page 2: Risks Involved
Transactional risks, management risks, volatility, gearing/borrowing, liquidity, asset-specific risks, etc.
Page 3: Composition of the SMSF Investments
Include allocation to each type of investment and/or asset class compared to what the ideal allocation should look like.
Maybe use a table to show actual allocation vs target allocation as well as any variance, as shown below.
|Asset Class||Actual Allocation||Target Allocation||Variance|
Followed by something along the lines of: as trustees, we expect the allocation to each investment or class of investment to fluctuate on a regular basis, due to the nature of the portfolio. Therefore, we accept a variance of up to 20% of the Target Allocation as acceptable.
This section should also include discussions on diversification or lack thereof. For example, having a 60% allocation to one illiquid asset such as a commercial property would be considered a lack of diversification, as it usually cannot be sold within a timely manner and, if it is sold, the whole asset needs to be sold (i.e. part of the property cannot be sold).
Page 4: Liquidity and Cash Flow
You want to discuss the ability and time frame for assets to be realised (sold and proceeds received) and what hurdles may be in the way. You should include any situations where investments may need to be sold on short notice and whether you would expect to receive a fair sale price in such a situation.
How do these liquid or illiquid assets impact the SMSFs ability to achieve its objectives?
Page 5: Asset Valuations
Valuation of the SMSF assets is important on a number of levels. It determines member balances, required pension payments, taxes and many other factors.
You will need to outline how each asset or class of assets will be valued and how often, as well as discussion around the adequacy and reliability of those valuations.
For bank accounts and listed shares owned by the SMSF, valuation is simple, because these assets are valued on a daily market basis and valuation is easy to obtain.
But what if the SMSF owns real property or shares in a private company? How will these be valued? Will the method and regularity of valuations be reasonable and acceptable when the SMSF is audited?
Page 6: Ability to Discharge Liabilities
Your SMSF will have certain cash flow commitments that it needs to meet, whether it be now or in the future, such as fees, management costs, expenses relating to assets, taxes, pension payments, loan repayments, etc.
This section of the SMSF Investment Strategy should outline how your SMSF plans on meeting these expenses, specifically relating to the types of assets or investments owned by the SMSF and how easily such investments could be sold if cash was required immediately.
Page 7: Tax Consequences of Investments
Each investment has different return characteristics. Some assets produce income or interest only (such as bank accounts and term deposits), some may be reliant on capital growth (such as private equity) and some (generally most) will have a combination of income and growth, such as Listed Shares (dividends and increase in price) or Real Property (rent and increase in value).
This section of the SMSF Investment Strategy should refer to the taxation consequences of the earnings (including capital gains) from the assets of the SMSF and how these will be paid.
Generally, income is taxed on an annual basis at a rate of 15% and Capital Gains are taxed upon sale of the assets (if a gain is realised) at 15% – reduced by 1/3rd if the asset realised was owned for longer than 12 months. However, this may be able to be reduced by capital losses throughout the year, or carried forward losses from previous years.
All earnings (including capital gains) are received tax free in the pension phase or the portion of the SMSF that relates to pension phase.
Read more: The ultimate guide to tax on Superannuation
Page 8: Investment Costs
What are the costs associated with the investments of the SMSF? This could include:
- brokerage costs
- stamp duties
- investment management
- financial planner fees
- property management, rates, maintenance, etc.
- sale costs and exit fees
- Include a discussion on how these costs will be met and impact any returns from investments
Page 9: Other Matters
This should include anything else you feel is relevant to the overall SMSF Investment Strategy. Think about these questions:
- How often will the SMSF Investment Strategy be reviewed?
- Are the returns of the SMSF portfolio being compared against a benchmark (e.g. inflation, RBA cash rate, ASX-200 Index)?
- Is there a unique asset of the SMSF that should be justified or explained further?
- Does the SMSF have the ability to invest in derivatives?
- Will the SMSF incorporate gearing/borrowing into it’s Investment Strategy
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Page 10: Sign-Off
The final page should include a sign-off from the chairperson of the SMSF, together with the date and location of where the SMSF Investment Strategy review was held.
SMSF Investment Strategy Minutes
SMSF investment strategy minutes should be kept each time an investment strategy document is established, reviewed or updated. Here is an example of minutes that could be used to adopt a SMSF Investment Strategy.
How Often Does an SMSF Investment Strategy Need to be Reviewed?
There is no set time frame for the review of the Investment Strategy. It is simply stated that it needs to be reviewed regularly.
I think this is because the regularity will be determined by the circumstances and investments of the SMSF.
The frequency of SMSF Investment Strategy reviews may be determined by factors such as level of contributions, stage of life of the members (accumulation or pension or both), types of assets owned by the SMSF and so on.
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