Key takeaways

  • Every SMSF must have a written Investment strategy that complies with the SIS Act and ATO guidance.
  • The strategy must consider risk, return, Diversification, Liquidity, Cash Flow and insurance.
  • The ATO expects trustees to review the strategy regularly, especially after significant events.
  • A poorly drafted or undocumented investment strategy is a common SMSF audit issue.
  • This article is general education only. Australians should consider speaking with a licensed financial adviser or SMSF specialist.

 

The investment strategy is one of the most important documents in any SMSF. It is required by law, and the Australian Taxation Office (ATO) takes it seriously. A well-prepared investment strategy:

  • Provides a framework for trustees’ decisions.
  • Documents the rationale for the fund’s investments.
  • Helps maintain compliance with the SIS Act.
  • Supports the SMSF’s annual audit and ATO oversight.

A weak or generic investment strategy is one of the most common issues raised by SMSF auditors.

This article explains the basics of the SMSF investment strategy requirement, what trustees should consider, and how to keep the strategy aligned with ATO rules.

What does the law require?

Under the SIS Act and associated regulations, SMSF trustees must formulate, regularly review and implement an investment strategy. The strategy must consider the whole circumstances of the fund, including:

  • The risk involved in making, holding and realising investments.
  • The likely return from investments.
  • Diversification across asset classes.
  • The liquidity of the fund’s investments.
  • The fund’s ability to meet existing and prospective liabilities (such as pensions).
  • Whether trustees should hold insurance for members.

The strategy should be in writing, even though the law does not prescribe a specific format. It is best practice to keep it dated, signed and stored with the fund’s records.

Risk and return

Trustees must consider risk and return in light of the fund’s circumstances. This includes:

  • The age and retirement timelines of members.
  • The mix of accumulation and retirement-phase balances.
  • The Risk tolerance of members.
  • The expected returns of different asset classes.

For some funds, this may suggest a higher allocation to growth Assets such as shares. For others, Capital preservation and stable income may be more important.

Diversification

Diversification is a key concept in the ATO’s guidance on investment strategy. A fund concentrated heavily in one asset (for example, a single property) faces concentration risk.

If trustees deliberately choose a concentrated portfolio (such as one major asset), the ATO expects them to:

  • Document the reasons.
  • Show they have considered the risks of concentration.
  • Address how they will manage liquidity and cash flow.

This does not necessarily mean concentrated portfolios are not allowed — but they require clear, documented analysis.

Liquidity and cash flow

Liquidity considerations are particularly important for SMSFs with:

  • Members in pension phase.
  • Significant Illiquid investments (e.g., direct property).
  • Borrowings under LRBAs.

Trustees must consider whether the fund can:

  • Pay member pensions on time.
  • Cover ongoing fund expenses.
  • Manage contributions tax and other obligations.
  • Pay benefits if members leave or die.

A fund that can’t meet its obligations on time may face serious compliance issues.

The fund’s liabilities

The strategy must consider the fund’s existing and prospective liabilities. Examples include:

  • Future pension payments.
  • Loan repayments under LRBAs.
  • Insurance premiums.
  • Accounting, audit and ATO levy expenses.

If liabilities are significant, the strategy must address how they will be met.

Insurance considerations

A specific legal requirement is that trustees must consider whether the fund should hold insurance for members. This includes:

  • Life insurance.
  • Total and permanent disability (TPD) insurance.
  • Income protection insurance.

Trustees do not have to hold insurance, but they must document their consideration. Many SMSFs document the decision either way to satisfy this requirement.

For more, see our planned SMSF compliance checklist.

Documenting the investment strategy

A practical SMSF investment strategy usually includes:

  • The fund’s objectives and member circumstances.
  • The expected investment time horizon.
  • Asset allocation ranges (e.g., 30%–60% Australian shares).
  • Specific considerations for liquidity and cash flow.
  • A statement on diversification.
  • Insurance considerations.
  • A statement on how often the strategy will be reviewed.

Trustees usually sign and date the strategy. Updates and reviews should also be signed and dated.

Reviewing the strategy

The ATO has emphasised that the strategy must be reviewed regularly. Many trustees review it at least annually, but reviews are also expected after significant events, such as:

  • A member joining or leaving.
  • A member commencing a pension.
  • A member’s circumstances changing significantly.
  • Major changes to the fund’s investments.
  • Significant market events.

Reviews should be documented, even if no changes are made. The auditor will often check evidence of review.

Practical example: a simple investment strategy framework

Imagine a fictional SMSF with two members. The trustees might draft an investment strategy that:

  • Sets long-term objectives consistent with members’ retirement timelines.
  • Includes asset allocation ranges across Australian shares, international shares, listed property, fixed income and cash.
  • Discusses liquidity, including the need to fund a future pension.
  • Considers and documents insurance decisions for each member.
  • Sets out a yearly review cycle and a process for ad hoc reviews.

This is illustrative only. Real strategies should be tailored to the specific fund and circumstances.

ATO rules and compliance points

Key ATO expectations include:

  • The strategy must be in writing.
  • It must consider all factors required by the SIS Act and regulations.
  • It must be reviewed regularly.
  • Diversification must be addressed, even if the fund is concentrated by design.
  • Insurance must be considered, with the decision documented.

The ATO has also reminded trustees that generic, template-based strategies copied from the internet are not always sufficient. Strategies should reflect the specific circumstances of the fund.

Risks, costs and limitations

Common risks around SMSF investment strategy include:

  • Audit issues: auditors may report a non-compliant or undocumented strategy to the ATO.
  • Concentration risk: lack of diversification can hurt retirement outcomes.
  • Liquidity issues: illiquid funds may struggle to pay pensions or expenses.
  • Insurance gaps: members may be under-insured if insurance was not considered.
  • Outdated strategies: strategies not reviewed in line with significant events may not reflect current circumstances.

What Australians should consider before acting

Common considerations include:

  • Whether the strategy reflects the fund’s actual circumstances.
  • Whether all required factors have been considered and documented.
  • Whether the strategy is reviewed regularly.
  • Whether professional advisers have been consulted on complex investments.
  • Whether the strategy is consistent with ATO guidance.