Investment strategies - Part 2 - Baumgartner Super’s response to the ATO guidelines

Late last year we highlighted the "Musts" and "Shoulds" of the ATO’s investment strategy guidance

As promised, we now build on that article by outlining our audit approach to testing an investment strategy's compliance with regulation 4.09 of the SISR.

Many of the ATO's "should" requirements identified in our previous article, represent best practice and what trustees should be including within their strategy.  However, it is not our role to drive trustees from basic compliance to a good strategy.  We are not looking to see a great strategy, instead we are looking for a minimum compliance standard and our audit tests outlined in this article are designed with that in mind.

We should also note at this point that our audit is not designed to provide comment on the quality of the strategy or its investments.  We are not licensed to provide financial advice so any perceived deficiencies will not be highlighted by us.

A close examination of regulation 4.09 reveals that meeting its requirements is actually a three-part process.  Trustees must:

1. Formulate an investment strategy in accordance with the legislation.
2. Review the investment strategy regularly; and
3. Give effect to its documented strategy.

Formulate an investment strategy in accordance with the legislation

1.     A compliant investment strategy would generally include at least the following:

• Some basic details about the members
• The fund's objectives
• Reference to the specific areas referenced in the regulation
• Details of the specific investment approach which may or may not include asset investment ranges

2.     Ideally the investment strategy would include a statement to the effect that the investment strategy has been formulated with regard to the whole of the circumstances of the fund, including those circumstances not specifically listed in the strategy. We need such a statement because it is impossible for SMSF auditors to be aware of all the relevant circumstances of the members of the fund without performing something akin to a fact find.

3.     We check to see that each of the following points, a) to e) have been specifically referred to within the strategy.

(a)  the risk involved in making, holding and realising, and the likely return from, the entity's investments, having regard to its objectives and expected cash flow requirements;

(b)  the composition of the entity's investments as a whole, including the extent to which they are diverse or involve exposure of the entity to risks from inadequate diversification;

(c)  the liquidity of the entity's investments, having regard to its expected cash flow requirements;

(d)  the ability of the entity to discharge its existing and prospective liabilities;

(e)  whether the trustees of the fund should hold a contract of insurance that provides insurance cover for one or more members of the fund.

Generally, we do not require more detail than the wording above, as a strategy which says it has been formulated with regard to these points meets the requirements of the regulation.

4.     In our standard representation letter, we include a representation that the trustee has had regard to the whole of the circumstances of the fund when formulating the strategy.  

Review regularly

1.     We require the trustee to confirm they have reviewed the investment strategy formally once a year in the minutes.

Whilst the ATO says significant events should prompt a review of the investment strategy, and we agree with this, we cannot audit to this standard as we can't not be aware of the significant events particular to each fund.

Give effect to its documented strategy

1. If the investment strategy includes asset allocation ranges, we will check that the fund's investments as at 30 June are in accordance with these ranges.
2. Where we assess a fund's investments to not be diversified, we will look to see that the investment strategy specifically refers to the risks arising from this inadequate diversification.
3. We will consider all the actions and investments which occurred during the year and ensure the trustee hasn't done anything contrary to what is recorded in the investment strategy.

Finally, a comment on the date of the investment strategy

Advisors often assist their clients with compliance with regulation 4.09 by providing them with an investment strategy template for them to complete.  Sometimes this occurs in conjunction with the advisor preparing the financial statements post year-end.  Advisors and trustees need to be mindful that when we are auditing compliance with regulation 4.09 for the year ended 30 June 2020, we are considering the investment strategy in place during that period.  Therefore, an investment strategy prepared and dated in February 2021, will not be relevant for the 2020 audit we are undertaking.

As always, we encourage you to contact the team at Baumgartner Super in Melbourne on 1300 04 SMSF (1300 047 673) with any queries or comments you may have regarding this or any other audit issue.