SMSF and the Investment Strategy

What is a SMSF Investment Strategy?

The self-managed super fund (SMSF) investment strategy is your plan for making, holding and realising assets that align with your investment objectives and retirement goals. It should set out how you’ve chosen to invest your retirement benefits in order to meet these goals.

Superannuation laws require that you must prepare and implement an investment strategy for your SMSF which you must then give effect to, and review regularly.

Your SMSF investment strategy should be in writing. It should also be tailored and specific to the relevant circumstances of your fund rather than a document which just repeats the words in the legislation.

Relevant circumstances may include (but are not limited to) personal circumstances of the members such as age, employment status, and retirement needs, which influence your risk appetite. Your strategy should explain how your investments meet each member’s retirement objectives.‍

How does it work?

Under superannuation laws, your strategy must consider the following factors relating to the circumstances of your fund:

• Risks involved in making, holding and realising assets, and the likely return from your fund’s investments.
• How the investments relate to the fund objectives and what the cash flow requirements are.
• Composition of your fund’s investments including the extent to which they are diverse (such as investing in a range of assets and asset classes) and the risks of inadequate diversification.
• Liquidity of the fund’s assets (how easily they can be converted to cash to meet fund expenses).
• Fund’s ability to pay benefits (such as when members retire and require a lump sum payment or regular pension payments) and other costs it incurs.
• Whether to hold insurance cover (such as life, permanent or temporary incapacity insurance) for each member of your SMSF.

Key requirements in building the investment strategy

The order in which you develop the strategy will help you clearly articulate and formulate a plan that you can adhere to.

• The investment objectives of the fund.
• The portfolio allocation strategy to meet this objective.
• The investment style for each asset class in the portfolio.
• The investment types to be employed for each asset class.
• The specific assets chosen for the investment type.
• Review and implementation, if required, of insurance benefits for each member.

What should I be thinking about?

Asset allocation for your SMSF

When formulating your investment strategy, it is generally not considered a valid approach to merely specify investment ranges of 0% to 100% for each class of investment. You also need to articulate how you plan to invest your super or why you require broad ranges to achieve your investment goals to satisfy the 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. 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.

Key investment rules for your SMSF

SMSFs have more flexibility in the investments they can hold for retirement benefits. It is because of this, there are some governing rules to these asset holdings and how investment can be conducted within the SMSF.

• The sole purpose test: The investment should be for the sole purpose of providing retirement benefits for the members of the fund. You cannot receive a benefit from the asset (hanging artwork on the wall at home) before retirement.
• In-house assets: No more than 5% of total fund assets can be an in-house asset, that is, investments with related parties of the fund.
• Borrowing in limited circumstances: The Trust Deed must allow for borrowing to invest. Strict rules apply to the type of investments, for example a single title property, the loan must be a limited recourse loan and the investment must be held on trust (through a bare trust arrangement). Professional advice should be sought before buying any asset with the intention of borrowing to fund the purchase.
• No lending to members: No loans to members or relatives of members.
• Arm’s length basis: All transactions must be on a commercial basis that is, no special favours or prices.
• No charge on assets of the fund: Trustees of the fund cannot give a charge or provide security over an asset of the fund.
• Acquisition of real estate: Generally there can be no benefit from assets of the fund before retirement. There are some exceptions to property ownership where a member may live on the property. Care should be taken to follow these exceptional rules as they relate mainly to business real property.
• SMSF reserves: These are unallocated monies not attributable to any members account and are only allowed in limited circumstances for specific and legitimate purposes as authorised by law.

Changes to the investment strategy

Your investment strategy should be reviewed at least annually and in the event of significant changes such as:

• The appointment or removal of members / trustees.
• Significant market corrections.
• Portfolio re-weight to strategy asset allocations.
• Member commences a pension.

All reviews should be documented in meeting minutes and any changes made should be documented also.

This information is of a general nature. It does not consider your personal objectives, needs or situation. It does not represent legal, tax or personal advice and should not be taken as such. If it has been provided to you with a Statement of Advice (SoA), you should rely on the personal advice in the SoA.

Care has been taken to provide up to date and accurate information relating to the subject area however BR Advice Pty Ltd (ABN 30 612 056 523, AFSL 488655), Blue Rock Private Wealth Pty Ltd (ABN 95 166 927 055, AFSL 452733), Blue Rock Private Wealth (Melb) Pty Ltd (ABN 48 652 202 698, ASIC AFS No. 1298365) and their representatives make no representation as to its accuracy or completeness.

Published: September 2022.

© Copyright 2022.