All Self-Managed Superannuation Fund (SMSF) trustees must formulate, review regularly and give effect to an investment strategy for their SMSF that complies with the Superannuation Industry (Supervision) Act 1993 (SIS Act), Superannuation Industry (Supervision)
Regulations 1994 (SIS Regulations) and the relevant Australian Taxation Office (ATO) requirements.
SIS Act and Regulations
Section 52(6) of the SIS Act and regulation 4.09(2) of the SIS Regulations, require that a trustee must formulate, review regularly and give effect to an investment strategy for the whole of the fund, and for each investment option offered by the trustee in the fund, taking into account:
- the risk involved in making, holding and realising, and the likely return from, the investments covered by the strategy, having regard to the trustee’s objectives in relation to the strategy and to the fund’s expected cash flow requirements;
- the composition of the investments covered by the strategy, including the extent to which the investments are diverse or involve the fund being exposed to risks from inadequate diversification;
- the liquidity of the investments covered by the strategy, having regard to the fund’s expected cash flow requirements;
- whether reliable valuation information is available in relation to the investments covered by the strategy;
- the fund’s ability to discharge its existing and prospective liabilities;
- the expected tax consequences for the fund in relation to the investments covered by the strategy;
- the costs that the fund might incur in relation to the investments covered by the strategy;
- whether the fund trustee(s) should hold a contract of insurance that provides insurance cover for one or more fund members; and
- any other relevant matters.
- Failure to comply with these requirements may carry a penalty .
- Once the trustee has formulated an investment strategy, the fund’s investments should be consistent with that strategy.
The ATO provides the following guidance on its website as to what trustees should consider when formulating an investment strategy:
- diversification — investing in a range of assets and asset classes;
- the risk and likely return from investments to maximise member returns;
- the liquidity of fund’s assets — how easily can assets be converted to cash to meet fund expenses;
- the fund’s ability to pay benefits when members retire, and to pay other costs the fund incurs;
- whether the fund should hold insurance cover for members; and
- the members’ needs and circumstances.