Every self managed super fund has to have an investment strategy. Not a view about markets, a document: something the trustees have written down, can point to, and are actually following.
It is one of the most commonly failed obligations in the SMSF system, usually not because trustees invested badly but because the paperwork was generic, out of date, or silent on the things the regulation specifically asks about.
Not Optional, and Not a Formality
The requirement sits in regulation 4.09 of the SIS Regulations. Trustees must formulate, review regularly and give effect to an investment strategy for the fund.
Those three verbs are the whole obligation, and each one fails differently. Formulating without reviewing leaves you with a document written in 2016. Reviewing without giving effect to it leaves you with a strategy the fund's actual holdings contradict. Both are contraventions, and both are visible to an auditor looking at your file.
Strictly, the regulation does not use the word "written". In practice your auditor has to sight evidence that the strategy exists and was considered, so an unwritten strategy is an unprovable one. Every SMSF should have it on paper, dated, and signed by the trustees.
A strategy downloaded from a template, ticking every asset class from zero to one hundred per cent, technically exists. It also tells an auditor that nobody thought about this fund in particular, which is the opposite of what the regulation asks for.
The Five Things You Must Address
Regulation 4.09 requires trustees to have regard to the whole circumstances of the fund, and then names five matters specifically. A strategy that does not deal with all five is incomplete.
Risk and return
- What it means
- The risk in making, holding and realising each investment, and the likely return.
- Judged against
- The fund's objectives and its expected cash flow needs, not the market generally.
Composition and diversification
- What it means
- The mix of investments as a whole, and the risk that comes from inadequate diversity.
- Judged against
- Concentration. One asset is allowed. Unexamined concentration is not.
Liquidity
- What it means
- Whether assets can be converted to cash when the fund needs cash.
- Judged against
- Expected cash flow requirements: pensions, expenses, loan repayments, tax.
Discharging liabilities
- What it means
- The fund's ability to meet existing and prospective liabilities as they fall due.
- Judged against
- Member benefits coming up, borrowings, and running costs.
Insurance for members
- What it means
- Whether the trustees should hold insurance cover for one or more members.
- Judged against
- Nothing. You need only consider it and record the decision. Most strategies forget entirely.
Diversification and the Single Asset Fund
A persistent myth says an SMSF must be diversified. It does not. The regulation requires trustees to have regard to diversification and to the risks of not having it. A fund holding one commercial property and nothing else can be entirely compliant.
What it cannot be is unexamined. If the fund is concentrated, the strategy has to say so, say why the trustees consider that appropriate given their circumstances, and address how the resulting risk is managed. That is a few paragraphs of genuine reasoning, and it is the difference between a defensible position and a contravention.
The ATO has taken an active interest here. In 2019 it wrote to roughly 17,700 SMSFs whose strategies appeared to hold ninety per cent or more in a single asset or asset class, asking trustees to demonstrate they had considered diversification. The letters were not penalties, but they made the expectation plain: concentration invites the question, and you should have the answer already written down.
Liquidity, Where Property Funds Come Unstuck
Liquidity is the requirement that does the most damage when it is ignored, and property funds are where it bites.
Property does not come in slices. A fund that owns a single property and has a member about to start a pension has to find the minimum pension payment in cash every year. Add a limited recourse borrowing arrangement with monthly repayments, plus the accountant, the auditor, the ATO levy and insurance, and the fund needs a predictable cash income it may not have.
Failing to pay the minimum pension can cost the fund its earnings tax exemption for that year, which is an expensive way to discover the problem. If the fund is heavily weighted to property, the strategy should set out where the cash comes from: rent, contributions, a cash buffer, or a plan to sell. Our guide to property investment through superannuation covers the wider mechanics.
The Insurance Question Everyone Forgets
Since 2012, trustees have had to consider whether the fund should hold insurance for its members. It is the most frequently missed item in the whole regulation, because it feels like it belongs somewhere else.
The obligation is light. You do not have to hold insurance. You have to consider it and record that you did. A sentence saying the trustees reviewed members' insurance needs, considered cover held outside the fund, and decided cover inside the fund was or was not appropriate, satisfies it.
A strategy with no mention of insurance at all does not, and it is the easiest contravention in this list to avoid.
Reviewing It, and Actually Following It
"Review regularly" is not defined with a number. The practical standard is at least once a year, documented, and again whenever something significant changes:
- A member joins or leaves the fund.
- A member starts or stops a pension.
- The fund buys or sells a major asset, or enters a borrowing arrangement.
- A member's circumstances change materially, through illness, divorce or retirement.
- Markets move enough that the actual allocation no longer resembles the documented one.
A review that concludes nothing needs changing is a valid review, provided it is dated and minuted. What is not valid is silence.
Then there is giving effect to it, which is where a tidy document can still fail. If the strategy says thirty per cent Australian shares and the fund holds none, the strategy is not being followed. Either the holdings change or the strategy does, but they have to agree.
What the Auditor Does
Every SMSF is audited annually by an approved SMSF auditor, and compliance with regulation 4.09 is part of that audit. The auditor will ask for the strategy, check that it addresses the five matters, check the date of the last review, and compare it against what the fund actually holds.
Where a contravention meets the reporting criteria, the auditor lodges an auditor contravention report with the ATO. From there the ATO decides what follows, which can include education direction, a rectification direction or administrative penalties against the trustees.
One structural point worth knowing. Administrative penalties are imposed on each individual trustee, so a fund with two individual trustees pays twice. With a corporate trustee the penalty is imposed once on the company. It is one of several reasons a corporate trustee is usually the better structure, alongside the simpler treatment when members change.
Almost none of this is about investing well. It is about being able to show that the trustees turned their minds to the right questions, at the right times, and wrote down the answers.
Frequently Asked Questions
Can I use a template?
As a starting structure, yes. As the finished document, no. A template that lists every asset class with a nought to one hundred per cent range commits to nothing and demonstrates no consideration of your fund. Auditors see these constantly and they are exactly what draws attention.
Do I need percentage ranges at all?
You are not required to use ranges, but they are the clearest way to show the composition you intend and to test whether you are following it. If you use them, keep them narrow enough to mean something and review the fund against them.
Our fund is all cash. Do we still need a strategy?
Yes. All cash is an asset allocation like any other, and it carries its own risk, principally that returns will not keep pace with inflation or fund expenses. The strategy should say why that allocation suits this fund.
What if the fund's holdings have drifted away from the strategy?
Deal with it at the next review, and document the decision. Either rebalance towards the strategy or amend the strategy to reflect a deliberate change of approach. Leaving the two inconsistent is the contravention.
Who actually has to sign it?
The trustees. Individual trustees all sign; with a corporate trustee the directors sign and it is minuted. The point is evidence that the decision was made by the people responsible for it.
Can our accountant write it for us?
We can prepare and document it, and make sure it addresses everything the regulation requires. The decisions in it remain the trustees', and specific recommendations about which investments to hold are financial advice, which requires the appropriate licence. Getting the two separated properly is part of doing this correctly.
The investment strategy is the least glamorous part of running a fund and one of the most frequently reported. It rarely fails because the investments were wrong. It fails because the document was generic, undated, silent on insurance, or quietly contradicted by what the fund actually owns.
Trew North Accounting administers self managed super funds for Melbourne trustees, including the annual strategy review. See our SMSF services, read our guide to setting up a fund, or get in touch.
This article is general information about trustee obligations, not financial product advice or a recommendation about any investment. Rules and thresholds change. Check current requirements with the ATO or with us.