AAT, Compliance, Investments, SMSF

Strategy must match investment actions

SMSF Investment strategy SIS Act Merchant v Commissioner of Taxation [2024] Administrative Appeals Tribunal DBA Lawyers Shaun Backhaus

SMSF trustees cannot only articulate an investment strategy, but must give effect to it each year to be compliant with their obligations under superannuation law.

An SMSF lawyer has reminded trustees they must give effect to a fund’s investment strategy and ensure the document aligns with their actual investment decisions in order to remain compliant with superannuation law.

DBA Lawyers senior associate Shaun Backhaus noted the recent case of Merchant v Commissioner of Taxation [2024] heard before the Administrative Appeals Tribunal (AAT) demonstrated the importance of regularly reviewing a fund’s investment strategy to ensure it was appropriate.

In this case, the AAT overturned the disqualification of a trustee who acquired shares from a controlled discretionary trust to realise a capital loss.

However, the trustee was still found to have contravened the Superannuation (Industry) Supervision Act because the investment was not permitted within the fund’s existing strategy.

“[The Merchant decision] has furthered the consideration of investment strategies and shown while many trustees might treat them as just a compliance document, what’s in them does matter,” Backhaus told attendees of a DBA Lawyers webinar last Friday.

“It’s not just those percentages that are important, it’s all the other content that is meant to be part of the strategy. If we’ve got trustees that don’t know what’s in the strategy, they need to know what’s in it, they need to read it and consider it.

“The AAT will look into the words written in the strategy and the other evidence surrounding the investment; communication with advisers, for example.”

If an SMSF trustee wants to make decisions that differ from the current investment strategy, he recommended updating the strategy and supplementing it with additional documentation to ensure compliance.

“Follow that strategy or change it when you’re doing big investments, for example, if it’s the first time the fund is investing in property or it has a limited recourse borrowing arrangement,” he said.

“Get that contemporaneous documentary evidence. There should be some resolutions confirming the trustees have looked at the investment strategy and an investment falls in line with the strategy, or if it doesn’t, change it. Having that document put down could be worth a lot.

“Practically it’s not necessarily about what the strategy is, it’s just about giving effect to it and showing that you’ve considered it. It’s hard to say you’ve given effect to a strategy if it’s very different to the investments you’re currently making.

“If people aren’t engaging with the strategy, that is risky for the fund. It could be a contravention and that also means that advisers or auditors are going to be at risk too.”

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