When you are investing your savings in your SMSF however, it is not just a case of choosing some assets and monitoring your choices for performance. There are also additional requirements you must satisfy as a trustee of your SMSF.

So what tips do you need to know as trustee of your SMSF when making investment decisions and how should these be recorded?

A retirement purpose

Whatever assets you choose to invest your SMSF in, there must be a clear and demonstrable retirement purpose in the choices you make. You probably are thinking that this is self-evident and surely must be a principle that all trustees of any SMSF would be guided by.

The tip here is knowing how the Regulator for SMSFs, the Australian Tax Office (the ATO), will test your decisions for this retirement purpose.
They will look to your investment decisions and ask what was your motivation as trustee for making that decision. They will look for any present ancillary benefits that may flow to you or others from owning that particular asset. So for example, if a present benefit that flows to you or others is judged to be substantial and sufficiently influential as to sway your decision making process, they may take the view that obtaining this benefit is why the investment was made, rather than for a retirement purpose.
They will look at your long term investment decisions, the percentage of the SMSF invested in particular assets, the performance of those investments and whether, in their view, the trustees genuinely made the investments in good faith at the time.

Another important tip here is to record your decisions and your reasons as you go. You may be asked to justify these after several years have passed and it is easier to refer to minutes of trustee meetings or contemporaneous trustee notes taken at the time.

How significant this may be for your SMSF will depend on many factors. You do not want the ATO as Regulator to take the view that your SMSF does not have a retirement purpose as a whole.

So think carefully about your investment decisions, be clear and genuine about your reasons for investing your SMSF in the assets you choose and record your reasons at the time.

You need an investment objective and strategy in writing

An important requirement for you as trustee of your SMSF is to have an investment objective and a strategy to achieve that objective in place, before you start to make decisions about how you want to invest your SMSF money.

While there is no legal requirement to have it in writing, the important tip here is that you do. The people who monitor your fund, like your SMSF auditor, your financial adviser or the Regulator will want to see your investment strategy in writing, so make sure you do have it in writing.
Having said that, there is no template or required wording for your investment objective and strategy. The essential tip for a relevant and appropriate investment objective and strategy is that whatever the document says, it spells out clearly how you as trustee intend to invest the SMSF money and provides a measure to test the performance of those investment decisions against.

Of equal importance is that the investment objective and strategy is not set in stone. Trustees can choose to change the investment objectives they have set for their SMSF at any time.

They might do this because the investment risk that some or all the members of the SMSF are willing to take has changed. Personal or financial circumstances of members may have changed. The investment environment may have shifted for the better or worse. Whatever the reasons, SMSF trustees are able to respond to those changes and change their investments accordingly.

Why should the trustees change the actual investment objective or strategy in these circumstances? Why wouldn’t they just change their investments and move on?

The answer here and the tip to be aware of is that trustees are required to only invest in assets which are accommodated by the investment strategy of their SMSF. In other words, the investment objective and strategy not only sets out how the trustees intend to invest their SMSF money, it must describe what the SMSF is actually invested in.

So if an investment that the trustees wish to make is not accommodated by the current investment objective and strategy, then the written document must be changed first, allowing that investment, before the trustees acquire the asset. Failing to do so is a breach of the trustees’ obligations.

Of course, it is possible to change investments where those new investments are within the current investment objective and strategy without having to alter any documents. As we noted earlier, it is still a good idea to document your reasons for the change at the time, rather than have to rely on your memory down the track.

Next time

In our next article, Investment tips for your SMSF – Part 2, we will look at tips on what to consider when creating your investment objectives and strategy, how you monitor it effectively and why some investment objectives and strategies are more acceptable than others.