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Time to review SMSF investment strategy

The SMSF industry should conduct a review of the current investment strategy rules and primarily whether the trustee’s responsibility to formulate the strategy was still appropriate, according to a sector expert.

AMP SMSF head of policy, technical and educational services Peter Burgess said the superannuation industry was in agreement in relation to the establishment of a default retirement product for Australian Prudential Regulation Authority (APRA)-regulated funds.

“This has been introduced to address longevity risk, in other words, the risk of people running out of money before they die,” Burgess told the AMP SMSF In Practice day in Sydney today.

“Now that [default option] won’t apply to SMSFs, which I think makes sense, however, we’ve got to be careful that we’re not being left behind on this discussion on longevity risk.

“I think it’s time to review the investment strategy rules around SMSFs and ask the question: Does requiring trustees to formulate their investment strategy still work?”

He said the SMSF industry also needed to assess whether that responsibility drove the right behaviours in the sector.

“I’m not sure it does,” he said.

“I think it’s time to review those rules because we need to remember that those rules were put in place in the mid-‘90s, at a time when SMSFs virtually did not exist but were there as a risk mitigation strategy for APRA funds.

“Perhaps we need to follow the overseas trends of targeting a retirement income amount rather than a lump sum amount and goal setting.”

An investment strategy sets out one or more investment objectives, primarily for one or more superannuation purposes.

Trustees are required by the Superannuation Industry (Supervision) Act to not only document an investment strategy, but also to ensure it is implemented.

Burgess also highlighted that the ATO was testing the return of the National Tax Liaison Group (NTLG) technical sub-group meeting.

“They abandoned those meetings a few years ago, but they’re re-trialling the introduction of a technical working group for the industry,” he said.

“We have asked them whether they will apply any tax avoidance provisions to clients who deliberately breached their non-concessional contribution cap as a way to wash away their taxable component.

“We have submitted this question to the first meeting, which will be in the first week of November, and their response to that question will go on the public record.”

He said he expected the NTLG not to have an issue with it for the same reason it did not have an issue with the standard re-contribution strategies.

“With the re-contribution strategies, it’s not clear who is receiving the tax benefit and also that tax benefit is contingent on other events happening,” he said.

“So I think it’s a similar argument here for the refunding rules, but we’ll see where we end up with that.”

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