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Are you planning to start building a Self-Managed Superannuation Fund (SMSF) investment strategy? If you are, then you've come to the right place.
This guide delves into the meticulous process of constructing a SMSF investment strategy step-by-step, offering comprehensive insights and expert advice. Navigating an SMSF requires a thoughtful approach, where financial goals align with prudent investment strategies and choices.
In this article, we explore what a SMSF strategy is and how you can make one. This can help you if you're a seasoned investor or new to SMSFs. So let's dive in.
What is a SMSF Investment Strategy?
A SMSF Investment Strategy is a comprehensive plan involved in making, holding, and realising your SMSF investment goals. It outlines how any Self-Managed Superannuation Fund (SMSF) will invest its assets to achieve the financial goals of its members.
It details the fund's objectives, risk tolerance, asset class, allocation, and investment methods, providing a roadmap for effective wealth growth and preservation within the SMSF framework.
What is a Self Managed Super Fund (SMSF)?
An SMSF, or Self-Managed Super Fund, operates like a normal retirement fund in Australia but with a few key differences. Firstly, the trustee of a SMSF (and therefore the controllers of the fund and fund assets) is typically the members of the fund rather than a superannuation company like AustralianSuper or HostPlus. Secondly, the investment options are far broader - with the ability to invest in assets not usually available in regular superannuation investments, such as property, art, cars and cryptocurrency.
These features grant individuals the authority to choose where their funds are invested and how they expand. This approach offers a hands-on method to handle one's retirement savings, providing a feeling of control and flexibility in making investment choices for the future.
SMSF Strategy Legal Requirements
According to Australian superannuation law, SMSF trustees must formulate an SMSF strategy and stick to it. This strategy must consider the fund's objectives, the members' retirement needs, risk tolerance, and the likely return from the fund's investments.
Additionally, trustees must regularly review and update this investment strategy to ensure it remains suitable and compliant with legal requirements.
Whilst there are templates available, there isn't a set form of investment strategy. If you're in charge of an SMSF, you can establish up and maintain terms that you feel best suit the needs of all members. But when you're working out that plan, it's important to consider a few things:
- Think about the risks when you're choosing where to put your money. Also, consider how much you'll likely get back from those investments, given what you're aiming for and when you'll need cash.
- Look at all the investments together. Make sure your investments are varied, and you're not taking too much risk by putting too much in one place.
- Think about how easily you can turn those investments into cash if needed.
- Ensure you can get reliable and regular valuations on all assets.
- Ensure that the fund can cover its current and future bills - including pension payments if one of the members is nearing retirement.
- Think about any tax implications from your investments and when they are likely to be payable.
- Keep in mind the costs which may come up because of your investments.
- Consider if you require personal insurance for some of the members in the fund, such as Life, Total and Permanent Disability (TPD), Income Protection and Critical Illness Cover.
Investment Objectives, Risk and Diversification
Crafting a sound investment strategy for your SMSF requires thoughtful consideration. The Trustees of any SMSF should set their sights on achieving specific growth targets, customised to suit individual preferences. This objective hinges on a thorough understanding of each member's needs, retirement timelines, risk tolerance, and growth aspirations.
Recognising that risk involved in making these investments and return are interconnected, Trustees must strike a delicate balance, aligning acceptable risk levels with the fund's circumstances. Diversification, the cornerstone of mitigating risk, involves spreading investments across various assets, sectors, and countries.
While diversification is key, early-stage limitations might pose challenges. This emphasises the need for strategic planning and adaptability. We note that the Australian Taxation Office (ATO) may engage with Trustees to ensure appropriate diversification practices - and penalties may apply where they feel that the Investment Strategy is not aligned to your SMSF members' needs.
Potential SMSF Investments and Expenses
Before starting your SMSF investment strategy, you should know about these potential investments and expenses.
Property Investments
Within a SMSF's investment strategy, you have the flexibility to invest in properties both domestically and internationally. Whether it's commercial or residential property, you can make outright purchases or opt for loans, which are obtained through a Limited Recourse Borrowing Arrangement, or LRBA.
International investments might involve working with foreign companies. In commercial property ventures, paying an arm's-length rent from your business to your SMSF property can provide tax benefits for your retirement fund. However, this strategy must be very carefully managed to ensure that there is no breach of the ATO's Sole Purpose Test. Personal use of SMSF residential properties is prohibited under all circumstances.
Taxation and Professional Fees
Maintaining sufficient liquidity is crucial for SMSF Trustees to discharge its existing taxes and fees. This ensures timely payment of taxes (income, capital gains, GST, PAYG, and contributions tax) and various expenses, including administration, brokers' fees, stamp duty, and legal fees.
Failure to meet these obligations may result in penalties and interest levied by the ATO, emphasising the importance of financial diligence and compliance.
Insurance
SMSF Trustees must evaluate the insurance requirements of each Member annually, addressing aspects like death and disability coverage. Since 2013, this consideration has become mandatory.
Trustees can explore insurance options through online quotes or financial advisors, ensuring appropriate coverage tailored to individual needs and circumstances. Seeking external professional support may empower Trustees to make well-informed decisions.
Investment Name
All SMSF investments must be registered under the SMSF's name, ensuring legal ownership alignment. The Fund needs to hold title to its assets exclusively. Individual names should not be associated with SMSF assets, maintaining clear distinction and compliance with regulations.
Audits
Every year, SMSFs undergo a mandatory independent audit. The auditor meticulously assesses the Trustees' various fund investments having regard to the member's designated investment strategy. If the SMSF lacks a strategy or plans for making them, the auditor highlights this, emphasising the necessity of a structured approach to investments within the fund.
SMSF Investment Strategy
So what should an investment strategy outline? Here's a quick template you can follow when you create your SMSF investment strategy:
Page 1: Title Page
This page typically includes the document's title, date of creation, and relevant identification details including the extent.
Page 2: Risks Involved
The potential risks associated with SMSF investments are outlined. This may include market volatility, economic fluctuations, and specific risks related to chosen investment types.
Page 3: Composition of the SMSF Investments
This section details the types of investments the SMSF holds, such as shares, bonds, property, or other assets. It also outlines the members of the SMSF diversification strategy and the rationale behind the chosen investments.
Page 4: Liquidity and Cash Flow
This page delves into the SMSF's liquidity, guaranteeing sufficient liquid assets to meet immediate financial needs, pay benefits to members, or cover unforeseen costs. It assesses how swiftly assets can convert to cash, considering expected cash flow requirements without compromising their value.
Page 5: Asset Valuations
Asset valuation is crucial for understanding the SMSF’s financial health. This section discusses how assets are valued, whether it's through market prices, appraisals, or other valuation methods.
Page 6: Ability to Discharge Liabilities
This section evaluates the SMSF's capacity to meet its financial obligations, including loan repayments or other debts. This ensures the fund can manage its existing and prospective liabilities without jeopardising its investments or financial stability.
Page 7: Tax Consequences of Investments
This section delves into the tax implications of the SMSF’s investments. It explores how different investment decisions might affect the fund's tax position, both positively and negatively.
Page 8: Investment Costs
This page outlines all costs associated with managing the investments. It includes fees, commissions, brokerage charges, advisor costs, and any other expenses related to buying, selling, and holding the assets.
Page 9: Other Matters
This section covers any additional considerations relevant to the SMSF’s investment strategy. It could involve ethical or environmental considerations, as well as any specific cash flow requirements or preferences of the fund members.
Page 10: Sign-Off
The final page typically includes signatures from the trustees confirming their agreement with the outlined investment strategy document. This sign-off indicates their commitment to adhering to the investment strategy document's guidelines.
Frequently Asked Questions
Who Creates the SMSF Investment Strategy?
SMSF trustees bear the responsibility of formulating and executing the fund's investment strategy and shaping the fund's assets. Expert advice from financial professionals is an option often explored by trustees of Self-Managed Super Funds to ensure well-informed decisions and optimised investment outcomes.
What Should be Considered in SMSF Investment Strategies?
Considerations include members' risk profiles, diversification across assets, liquidity needs, and long-term financial goals. All inclusions must comply with strict legal framework, including ongoing cash flow requirements.
Can an SMSF Invest Overseas?
Yes, SMSFs have the flexibility to invest in global assets. If doing this, you should take into account adhering to precise regulations and compliance standards, as well as global investment sectors and currency risk. Seeking counsel from a financial advisor ensures meticulous adherence to guidelines, optimising the dollar allocation and asset allocations across international investments for prudent and diversified portfolio management.
What Happens if the SMSF Investment Strategy Is Not Followed?
Strict adherence to investment strategy requirements is imperative for an SMSF trustee. Deviation can result in penalties from the ATO and jeopardise the fund's complying status, potentially impacting its tax advantages. Staying aligned with the stipulated investment strategy template ensures regulatory compliance, safeguarding the fund's financial health.
Is Professional Advice Necessary for Creating an SMSF Investment Strategy?
Maintaining detailed SMSF investment strategy minutes is crucial for an individual or a corporate trustee, outlining the fund's objectives and investment plan for making all decisions. Seeking guidance from financial advisors or accountants enhances strategy effectiveness, ensuring compliance and informed choices, and promoting the fund's financial stability and growth.
How Often Should the SMSF Investment Strategy be Reviewed?
The investment strategy should be reviewed at least annually, to ensure it remains aligned with the fund's objectives and the changing financial landscape. We encourage that you seek financial advice when conducting these reviews.
What is the Role of Diversification in an SMSF Investment Strategy?
Diversification spreads investments across different asset classes, reducing risk. This element has a crucial effect to an investment or SMSF investment strategy to enhance the fund's stability. The opposite effect would occur if there is inadequate diversification.
Can SMSFs Invest in Real Estate?
SMSFs can invest in real estate, adhering to stringent regulations. In most cases the property shouldn't initially be owned by a fund member, and it must align solely with the fund's retirement objectives. Proper asset allocation and meticulous adherence to superannuation investment rules are crucial when considering real estate investments within an SMSF.
What is a Limited Recourse Borrowing Arrangement?
A Limited Recourse Borrowing Arrangement (LRBA) is a specific financial structure in which a self-managed superannuation fund (SMSF) can borrow the fund's investments to acquire certain assets, typically property. The "limited recourse" aspect means that if the SMSF defaults on the loan, the lender's recourse is limited to the assets purchased (the property) with the borrowed funds.
In other words, the lender's claim is restricted to the specific property or asset financed, protecting the other assets within the SMSF. This arrangement allows SMSFs to leverage borrowed funds for investments while mitigating the risk to the fund's overall material assets.
Final Thoughts
Crafting a robust investment plan tailored to members' needs, risk tolerance, and long-term goals is not just a legal obligation but a pathway to financial security. Regular reviews and staying abreast of legal requirements are vital.
Seeking professional advice adds a layer of expertise, ensuring compliance and informed decision-making. If you need that additional guidance, we're ready to help you where you need it most. Don't hesitate to reach out to us if you need help with your self-managed super fund or your SMSF strategy.
An SMSF investment strategy will help secure dreams, provide for the future, and build a resilient financial foundation for all members involved in holding. If you want to be sure that you've got everything right, get in touch with our team.
James O’Reilly is the Director of Northeast, a fast-growing financial advice firm that empowers clients to achieve meaningful financial progress and well-being. He's also the co-host of the Australian Retirement Podcast, one of Australia's fastest-growing podcasts.