Documentation, Investments

Liquidity will test trustee strategies

liquidity investment strategy

A failure by trustees to account for liquidity in an investment strategy may be tested by SMSF members hit by COVID-19 related losses.

The level of liquidity within the investment strategy of an SMSF is likely to come under greater scrutiny as a result of COVID-19’s impact on returns and may cause members to seek redress from trustees under superannuation law, according to a technical expert.

SuperGuardian education manager Tim Miller said the ATO’s focus on investment strategies in 2019 highlighted the need for SMSF trustees to consider what liquidity was available to members from their fund’s investments, particularly when unforeseen events take place, but was unsure that message had been heeded.

Miller said the ATO emphasised SMSF investment strategies had to be reflective of what was taking place in the fund and trustees were given effect to the strategy, including a consideration of the liquidity level needed to meet the fund’s liabilities.

“It is not just a set of assets and the percentage range that you want to put into it. It is a guide to investments for the SMSF and addressing how each investment in the fund is going to satisfy the liquidity requirements.

“The whole concept of giving effect is to state that in the event of unforeseen circumstances – and clearly what we’ve been in the last several months is unforeseen circumstances – how is the fund going to deal with it, and I think that’s an area that probably most trustees haven’t really covered off.”

Miller warned trustees who did not have sufficient liquidity provisions within a fund which was impacted by COVID-19 could become subject to section 55 of the Superannuation Industry (Supervision) (SIS) Act, which allows members to recover loss or damages for the contravention of a fund covenant.

“Section 55 is effectively the ‘stay out of jail’ or the ‘go to jail ‘clause because it states the importance of these SMSF covenants and if the fund, or members, suffer losses due to the trustees not performing their duties in accordance with the trustee covenants, then those beneficiaries can take action against any of the parties involved in the non-performance of their covenant requirements,” he explained.

These covenant requirements included the need to formulate, review and give effect to the investment strategy, including liquidity, which became an area of concern for some funds during 2020, he noted.

“If a trustee said we don’t need to think about liquidity and then COVID-19 struck and the fund suffered loss of rental income, and then loses its exempt pension income status and other things like that occur, then you know some of the members and beneficiaries are going to say ‘you didn’t think about that’,” Miller said.

“This is a different set of circumstances [from where] a trustee has thought [about] these things and [included them] in the investment strategy [but] still makes losses that come under the ‘tough luck rule’.

“Bad things happen to investments and if you’ve contemplated those and they do [subsequently] happen then there’s no recourse necessarily against the parties involved.

“It’s that concept of dotting the I’s and crossing the T’s when it comes down to the investment strategy of the fund, and it’s a key issue that does get raised a lot, and I suspect that it will be raised a lot in preparation of the 2019/20 and 2020/21 financials,” he predicted.

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