Ensuring the investment strategy of a self-managed superannuation fund (SMSF) accurately reflects its current asset allocation is an important compliance responsibility. While there is a degree of flexibility with respect to movements in your overall asset allocation, it is good practice to review your current asset allocation against your documented strategy. If the fund’s current allocation falls outside the documented strategy you may wish to make an adjustment to either so they fall into line.
It is reasonable to expect that your SMSF’s asset allocation will have a degree of tolerance over the short term which fall either side of the long term target. But a regular review is something you should get into the habit of doing as it’s required by the super law.
Some of the more common situations where your SMSF’s investment strategy should be reviewed include:
- Trustees purchasing property for their fund, but not updating the investment strategy to reflect the purchase;
- An asset class, such as listed shares, being over the fund’s target position due to significant rises or falls in the underlying holdings;
- Trustees moving from accumulation to pension phase and changing asset allocation due to cash flow needs but neglecting an investment strategy update.
- Trustees choosing to invest a high proportion, 90% or more, of the fund in one asset or asset class can lead to concentration risk. In this situation, the fund’s investment strategy needs to document how the trustees have considered the risks associated with a lack of investment diversification. This should include how high concentrations of investments can meet the fund’s investment objectives including predicted returns and cash flow requirements.
Capital Gains Tax review
In the lead up to the end of any financial year, trustees and their advisers may wish to undertake tax planning to minimise the CGT position of their SMSF. This is usual where an SMSF has assets with an unrealised loss position. Trustees may seek advice on whether it is worthwhile to crystallise the unrealised losses to reduce any of the fund’s realised gains. It’s important to understand there may be tax consequences arising by simply selling an asset and buying it back immediately.
One of the trustee’s most important obligation is to ensure for purposes of preparing the fund’s financial accounts that assets are valued at market value each year. This is a legal requirement and ensures the value of the fund assets and member balances reflect the fund’s current situation. There are valuation implications for each member’s Total Super Balance as well as the fund’s tax exempt income if it is paying pensions.
The value of some of the fund’s investments may be easy to obtain, such as listed company shares and bank account balances. However, when it comes to real estate and other fund investments, market value may not be that obvious and a valuation may be required from an appropriately qualified person, such as an independent registered valuer or real estate agent.
For assets where a valuation is not easy to determine it is necessary to obtain evidence to support whatever value you decide on as it assists when the fund is audited. For the more exotic assets such as privately held unlisted shares, unit trust holdings or artworks and collectables the matter can always be raised with the fund’s auditor to see whether the fund is on the right track.