The strategy should document an objective and it must consider risk, return, liquidity, diversification and the cash flow obligations relevant to the fund and fund members. The strategy must also consider whether the trustee should have insurance for the member of the fund, and the strategy must be regularly reviewed by the trustee.
Where we see our clients tripping up in their attempt to comply with the requirements is their strategy will have ranges listed for the investment classes the trustee has considered to be appropriate to meet the needs of the members. In some instances these ranges are too restrictive, or simply haven’t been looked at before the trustee makes an investment decision and, as a result, the fund invests outside the ranges permitted. This may seem innocent enough, and is certainly easy enough to correct (the trustee simply needs to adopt a new strategy to expand the ranges permitted), but SMSFs must also give effect to their strategy. They can’t simply have a strategy, it must be a live, working document, and they must put it into action. The obligation to ‘give effect’ is a legislative requirement, so by having investments outside the permitted ranges results in a compliance issue that usually requires the auditor to report the fund to the ATO.
A further challenge for many trustees is the requirement to regularly review the investment strategy. We have determined that the term ‘regularly review’ equates to a trustee review of the strategy at least annually. The term regularly reviewed is not defined in the legislation, and as a result we request all our clients review their strategy at least once a year. Otherwise we have no way of being able to confirm the strategy has been reviewed by the trustee. Unfortunately, we have many clients who produce minutes detailing the investment strategy has been reviewed, but these minutes will evidence a meeting hasn’t been held in the year we are auditing. Typically the minute is dated after year end, which will assist in the subsequent year audit, but not the current year audit! This leaves the fund with no evidence they have reviewed their strategy for the year under audit.
The best approach to the obligations of the investment strategy is to keep the content simple and flexible. A strategy that is convoluted or overly complex simply makes it easier for the trustee to fail the requirements they impose on themselves.