An Investment Strategy sets out what your SMSF can invest in. When Superannuation Warehouse sets up a new SMSF, we issue you with an Investment Strategy Template which 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. Initially you may decide to invest in cash only.
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 of the Fund. The Fund must pass the Sole Purpose Test and all investments must be made and maintained on an arms-length basis.
Investment Strategy legal requirements
Under the SIS Act a Trustee of an SMSF is solely responsible and directly accountable for the management of fund Members’ benefits. Trustees have a duty to make, carry out, and document decisions on how SMSF assets are invested and to carefully monitor the performance of the investments. This duty involves formulating and implementing an investment strategy.
Most Trustees cite “control of investments” as the prime motivation for setting up their SMSF. 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:
- 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;
- 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;
- the liquidity of the SMSF’s investments, having regard to its expected cash flow requirements, for example: payment of tax, the superannuation surcharge liabilities of the members, lump sum benefits if a member leaves the SMSF, and regular pension payments;
- the ability of the SMSF to discharge its existing and prospective liabilities.
Investment Objectives, Risk and Diversification
The SMSF may aim to obtain an average yield of say, 6% from all investments. In order to achieve this objective, Trustees should consider the needs of each Member of the Fund. Take into account when each Member is due to retire, your risk profile and your growth targets. If risk levels are different for different Members, consider setting up a separate SMSF.
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 also reduces the volatility of the returns on the investments. Diversification means 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 the amount of funds available for investment may be limited.
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.Download our Sample Investment Strategy
The Tax Office also has a video explaining the importance of having an investment strategy in place when you operate your SMSF. To view the video, please click here.
For other useful documents (e.g. Trustee Declaration and Financial Statements), follow this link.