Investment Strategy

An Investment Strategy sets out what your SMSF can invest in. When Superannuation Warehouse sets up a new SMSF, we will issue you with an Investment Strategy , which you can edit to reflect your investment choices.

A good Investment Strategy will give you a wide choice of assets to invest in. It’s a good idea to consider a wide range of investments to invest in, both locally and overseas consisting of cash, shares and property. Even if you plan on the short term to invest only in cash, it’s a good idea to have a wider investment strategy so the investment strategy does not limit the investment choices you can make.

To see our sample SMSF Investment Strategy , click here:

Definition

An investment strategy is a detailed financial plan made by the Trustees of a SMSF based on consideration of the Sole Purpose of the Fund. It takes into account the current and future financial needs of each of the fund members and all investments need to be made and maintained on an arms-length basis.

Investment Strategy legal requirements

Under the Act a Trustee of the SMSF is solely responsible and directly accountable for the management of the Members’ benefits. The Trustee has a duty to make, carry out and document decisions about investing the assets of the SMSF and to carefully monitor performance. This duty involves formulating and implementing an investment strategy.

The majority of Trustees setting up a SMSF cite control of investments as their driving factor in setting up a SMSF. As a Trustee of SMSF, you are required by law to prepare and implement an investment strategy for your SMSF and review it on an ongoing basis.

The investment strategy must have regard to the whole of the circumstances of the SMSF, including:

(i) the risk involved in making, holding and realising the SMSF’s investments, and the likely return from these investments, having regard to the SMSF’s objectives and its expected cash flow requirements;

(ii) the composition of the SMSF’s investments as a whole, including the extent to which the investments are diverse or involve the entity in being exposed to risks from insufficient diversification;

(iii) the liquidity of the SMSF’s investments having regard to its expected cash flow requirements, for example: payment of tax, superannuation surcharge liability of the members, lump sum benefits if a member leaves the SMSF, or regular pension payments;

(iv) the ability of the SMSF to discharge its existing and prospective liabilities.

Investment Objectives, Risk and Diversification

The objective for the SMSF should be a benchmark e.g. to obtain an average yield from all investments of 6%. In setting the objective, consider the needs of each member. Consider the age to retirement for each member, your risk profile and growth targets. If the risk levels are different for members in the SMSF, consider segregating member accounts or setting up a separate SMSF.

Risk is a possibility of loss on an investment. There is a strong correlation between risk and return. This means that the Trustee must determine an acceptable level of risk and volatility of the returns in the light of the SMSF’s circumstances.

Diversification in investments is desirable to disperse and manage risk, and reduces the volatility of the returns on the investments. It can be achieved by spreading investments over a number of individual assets, classes of assets, countries or investment managers. It may be difficult to achieve diversification in the early stages when there is limited amount of funds to be invested.

Property Investments

A SMSF can invest in property locally or overseas and you can invest in commercial or residential property. The purchase could be outright using cash or using a limited recourse borrowing arrangement. When investing in overseas property, you might have to use a foreign company to facilitate the investment.

When investing in commercial property with your SMSF, you can acquire a property and pay an arms-length rent amount from your business and claim a tax deduction towards funding your own retirement. Remember no personal use for residential properties in a SMSF.

Paying Expenses

The Trustees need to maintain sufficient liquidity to pay taxes of the fund (income, capital gains, GST, PAYG and contributions tax), and must ensure that other expenses such as administration expenses, brokers fees, stamp duty and legal fees are paid on a timely basis to avoid late fees, penalties and interest.

Insurance

Trustees should consider the death and disability insurance needs of each member. Insurance can be held within a SMSF. See our article on insurances when transferring funds from a retail fund.

Investment name

Always have all investments of the SMSF in the name of the SMSF. The Fund have title over all assets in own. So you can not have a SMSF asset in your own name, it has to be in the name of the SMSF.

Audits

SMSFs are required to have an annual independent audit.  The Auditor will review the investments by the Trustees to ensure they are consistent with the investment strategy. If the SMSF does not have an investment strategy the auditor will raise this point.

Summary

When setting up a new SMSF we will issue you with an Investment Strategy. You can tailor this to your own needs and this should be tailored on an ongoing basis.

To view our sample investment strategy, click here and for other documents you can use, click here (e.g. Trustee Declaration and Financial Statements).

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