An Investment Strategy sets out what your SMSF can invest in. When we set up a new SMSF for you, we will issue you with an Investment Strategy Template that you can edit to reflect your choice of investments.
A good Investment Strategy will give your SMSF a wide choice of investment options. SMSFs can generally invest in cash, shares and property, both locally and overseas. SMSFs can also invest in cryptocurrency.Initially, you may decide to invest in cash only and later diversify your investments.
To download a sample of our Investment Strategy template, please click on the button below:
An Investment Strategy is a detailed financial plan made by the Trustees of an SMSF based on the current and future financial needs of each Member in the Fund. The Funds’ investments must pass the Sole Purpose Test, this means that all investments must be made and maintained on an arms-length basis and that the investment must provide for the Members’ retirement.
Under the SIS Act, Trustees of an SMSF are responsible and directly accountable for the management of Funds’ Members benefits. Trustees have a duty to make, carry out and document all decisions on how the SMSFs’ assets are invested, they must carefully monitor the performance of the investments. This duty will involve formulating and implementing an Investment Strategy. The Investment Strategy should be reviewed annually or reviewed when new investments are considered, if required the Trustees may wish to update their current Investment Strategy.
The main motivation that Trustees have for setting up an SMSF is “control of investments”. As a Trustee, 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 take into account every aspect of the SMSF, including:
Please see below for a general SMSF Portfolio Asset Allocation.
The Trustees of the SMSF may aim to obtain an average yield of their choosing from all investments e.g. 6%. In order to achieve this objective, Trustees should consider the needs of each Member in the Fund. Trustees should also take into account when each Member is due to retire, your risk profile and your growth targets. Generally, risk levels are different for each Member. If Members risk levels are too diverse within an SMSF, they may wish to setup their own SMSFs with other like-minded individuals.
Risk is the possibility of loss on an investment. There is a strong correlation between risk and return. This means that the Trustees must determine the acceptable level of risk and volatility of the returns in the light of the SMSF’s circumstances. Diversification of investments may be desirable in order to disperse and manage risk; it can also reduce the volatility on the return on investments.
Diversification means spreading investments over a number of individual assets, classes of assets, countries, or investment managers. The ATO may contact Trustees to ensure that their SMSFs are appropriately diversified. However, it may be difficult to achieve diversification in the early stages when the amount of funds available for investment may be limited.
Please see below for FAQs about SMSF Investment Strategies
It is legal to have more than 90% invested in a single asset class. However, the Trustees should ensure that it is a considered decision under the Fund’s Minutes of Meetings and Investment Strategy. A considered decision is one where the Trustees have considered all other options and choices in regards to their knowledge of potential investments.
Trustees should review their Investment Strategy annually. Although not explicitly required by the ATO they do state to review the Investment Strategy regularly. Trustees should consider reviewing their Investment Strategy annually and when circumstances change in a Funds investments.
The ATO is in the process of writing to SMSF trustees and their auditors, for SMSFs that hold 90% or more of its Funds in one asset class, to ensure that it meets the appropriate diversification requirements. This raises a concern that the Fund may not be complying with the operating standard.
As a proactive measure to stay compliant Trustees can also complete a compliance form to provide as extra Audit evidence at year end, this can help your SMSF Auditor form a favorable opinion on your Funds’ compliance. We have created a compliance checklist that can be found here:
An SMSF can invest in property locally or overseas. You can also invest in commercial or residential property. Purchases can be outright using cash or using a limited recourse borrowing arrangement. When investing in overseas property, you may have to use a foreign company to facilitate the investment.
If you decide to invest in commercial property with your SMSF, you can acquire a property and pay an arm’s-length rent amount from your business and claim a tax deduction towards funding your own retirement. And remember, personal use of your SMSF residential property investment is not allowed.
The Trustees must maintain sufficient liquidity to pay the Fund’s taxes (income, capital gains, GST, PAYG and contributions tax), and must ensure that other expenses, such as the cost of administration, brokers’ fees, stamp duty and legal fees are paid on a timely basis, otherwise the ATO will impose penalties and interest.
Trustees should consider the death and disability insurance needs of each Member. From 2013 it is a requirement for Trustees to consider insurance in the SMSF on an annual basis. To take out insurance, Trustees can take an online quote or use a broker. The choice is yours. More details of options available here.
Always have all SMSF investments in the name of the SMSF. The Fund is obliged to have title over all the assets it owns. You can’t have an SMSF asset in your own name.
SMSFs are required to have an annual independent audit. The auditor will review the Trustees’ investments to ensure that they are consistent with the investment strategy. If the SMSF does not have an investment strategy the auditor will raise this point.
When setting up a new SMSF we will issue you with an Investment Strategy Template. You can tailor this to your own needs on an ongoing basis.