Self managed superannuation fund (SMSF) investment strategy considerations

Self-Managed Superannuation Funds (SMSFs) are a highly personalised and flexible superannuation savings vehicle. Members of the SMSF are also the trustees, and are therefore able to determine the investment strategy and select specific investments of the fund. This provides an investor with a high degree of control over the investment portfolio, including member-directed investments.

What is a self-managed superannuation fund (SMSF)?

SMSF, (sometimes referred to as a DIY fund) is a superannuation fund with fewer than five members, all of whom are usually family or business related.

All trustees must be members and vice versa up to a maximum of 4 with the exception of a single member fund. A single member fund must have a second trustee (all funds must have a minimum of 2 trustees), or a corporation may operate as the trustee.

Only resident funds will be complying funds for the purposes of the Income Tax Assessment Act (‘ITAA’) and Superannuation Industry (Supervision) (‘SIS’) legislation. If a SMSF has elected to become regulated under SIS (a regulated fund) and the SMSF is a resident fund, then the SMSF will be classified as a complying fund, and be entitled to tax concessions.

Trustee responsibilities of SMSFs

Initially the SMSF must be established under a comprehensive and well-drafted trust deed. The SMSF must also have, and follow, a detailed investment strategy, which is discussed below.

In addition, trustees of SMSFs are required to:

  • keep accurate and accessible accounting records that explain the transactions and financial position of the SMSF for a minimum of 5 years;
  • prepare an annual operating statement and an annual statement of the SMSF’s financial position and keep these records for a minimum of 5 years;
  • prepare minutes of trustee meetings (where matters affecting the SMSF were discussed), and prepare records of all changes of trustees and members’ written consent to be appointed as trustees. Each of these documents must be kept for a minimum of 10 years;
  • keep copies of all annual returns lodged for a minimum of 5 years;
  • have the SMSF audited annually by an independent auditor;
  • keep copies of all reports given to members for a minimum of 10 years.

Trustees cannot be paid with respect to their obligations or responsibilities in running the SMSF.

Poor and inadequate record keeping has been identified as a major problem for SMSFs. Trustees need to give this area detailed attention, as this can pose a compliance risk for SMSFs. The Australian Taxation Office (ATO) is responsible for the regulation of SMSFs and has the power to remove the tax concessions afforded to superannuation funds, among other penalties, where a SMSF is found to breach the appropriate legislation and reporting requirements.

In cases where members no longer wish to undertake the trustee responsibilities, they can instead choose to appoint an approved trustee. This is an independent trustee, approved by the Australian Prudential Regulation Authority (APRA) under Part 2 of SIS, who meets the relevant solvency, capital adequacy and operational capacity requirements. The SMSF will become a small APRA superannuation fund and be regulated by APRA instead of the ATO.

SMSF investment strategy considerations

It is essential that the trustee establishes and documents a sound SMSF investment strategy that takes into account:

  • the fund’s liquidity requirements, and
  • the goals and objectives of the members of the SMSF, and
  • the members’ risk tolerance and circumstances, and
  • members’ ages and investment time frame, and
  • investment powers of the trustee (as detailed in the trust deed).

Trustees of SMSFs can be penalised if they fail to put an investment strategy in place. A member who suffers loss as a result of a breach of this requirement can sue the trustees to recover the loss. To ensure the trustee is protected from legal action by a member suffering any loss as a result of this breach, the underlying investments of the SMSF need to be considered in light of the investment strategy.

The investments/assets also need to be appropriate to meet the sole purpose test.

SMSF Sole purpose test

The sole purpose test requires that the SMSF be maintained for the sole purpose of providing its members with retirement benefits, or providing its members’ beneficiaries or dependants with benefits in the event that the member dies before retirement. Certain other ‘ancillary’ purposes are permitted within the sole purpose test, including payment of disability benefits for a member’s retirement due to ill-health or in other circumstances approved by APRA. It is absolutely imperative that SMSF monies are kept separate from monies for other purposes (such as living expenses). This will include keeping an entirely separate set of bank accounts, investments and accounts.

Given the significant penalties for trustees of SMSF for breaches of legislation, it is essential that the trustee reviews the investment strategy of a SMSF.

Need investment strategy advice for your SMSF?

If you would like investment strategy advice for your SMSF contact an xLife Superannuation Adviser today. Our advisers can help create an investment strategy that will meet all legal requirements and offer your members adequate returns.

January 2011