Mr Colley said superannuation law requires that a fund trustee must consider:

• the fund’s investments as a whole and include the extent to which those investments are diverse or involve exposure of the fund to risks from inadequate diversification;
• the liquidity of the fund’s investments, having regard to its expected cash-flow requirements;
• the ability of the fund to discharge its existing and prospective liabilities; and
• whether the trustees have considered insurance cover for one or more fund members.

In addition, Mr Colley said an investment strategy requires the trustee to closely follow when circumstances change and that the investments are adjusted accordingly.

As examples, he said adjustments may be required:

• when cash flows required of the fund change with the commencement or cessation of an income stream;
• where a lump sum must be paid in cash; or
• where the membership of the fund changes.

Besides those circumstances, Mr Colley said the law requires a regular review (in most cases, annually) and confirmation from the trustee to the ATO that this has taken place.

ATO zoning in on strategies with high concentrations in one asset class

According to Mr Colley, the ATO now takes a much greater interest in investment strategies, especially those which have high concentrations of investments in one asset class, such as property, shares, cash or fixed deposits.

He said he’s noticed renewed interest on the part of auditors in closely examining funds to ensure investments are consistent with the fund’s investment strategy, including the reasons behind high concentrations in one asset class.

Further, Mr Colley said this is usually brought to the attention of trustees in the auditor’s Management Letter, but, in the worst cases, may be brought to the attention of the ATO.

As a result, he advised that if an SMSF’s investment strategy doesn’t adequately fulfill its legislated requirements, the trustee generally has one of two options:

• replace the SMSF’s current investment strategy with one that does meet the Superannuation Industry (Supervision) Act; or
• provide an amendment to the current investment strategy which provides additional information on how the trustee(s) have considered the above requirements.

“In most situations, auditors have accepted amendments to the investment strategy that includes the additional information required,” Mr Colley said.

“Such an amendment typically details how the trustee has considered the SIS requirements and why investments have been made, with respect to the various needs of fund members. It should directly and comprehensively cover areas in which the strategy has been identified as deficient.”