How a client’s investment strategies can cost an adviser their home

How a client’s investment strategies can cost an adviser their home

LightYear Group, We Love Group, and Accountis Director Michael Jeffriess was on stage at the SMSF Auditors Association conference on the Gold Coast and looked at SMSF investment strategies.

“It was great to be in front of such an enthusiastic crowd on what auditors MUST look for in SMSF investment strategies in line with the detailed guidelines offered by the ATO, which largely seem to be ignored.” said Michael Jeffriess. “This is dangerous because if an auditor lets a document, purporting to be an investment strategy through and it does not meet the guidelines, the members of the Fund have an action to recover investment losses from the auditor. This is not well known.”

Some of the main SMSF investment strategy issues the Mr Jeffriess covered were:

1. Are the members of a SMSF’s personal circumstances needed to be included in an investment strategy?

 The Commissioner states up front in his investment strategy guidelines that:

“Your SMSF investment strategy should be in writing. It should also be tailored and specific to the relevant circumstances of your fund rather than a repeat of legislation.

Relevant circumstances may include (but are not limited to) personal circumstances of the members such as their age, employment status and retirement needs, all of which influence investment risk. Strong investment strategies should explain how the investments will meet each member’s retirement objectives.

Without these characteristics within the document signed by the Trustees, the document is NOT an investment strategy.

2. I have an SMSF with an investment strategy that has ranges for different asset classes that are all listed as 0% to 100%. Should I qualify the audit report and lodge an ACR re the investment strategy not being properly prepared? 

The Commissioner has stated in plain English that this is NOT an investment strategy! The Commissioner states as follows in terms of auditor intervention:

If your auditor identifies that you have breached the investment strategy requirements, the breach must be ratified immediately. If your strategy failed to adequately address some of the factors mentioned above, such as the risk of inadequate diversification, you can fix this by attaching a signed and dated ‘addendum to the strategy’ or a ‘trustee minute’ which adequately addresses the requirements. You should then present this to your auditor prior to finalisation of the audit.

If you failed to invest in accordance with your strategy, you should revise your strategy to ensure it reflects your fund’s investments and how those new investments will meet your retirement objectives. You should then ensure you adhere to the new strategy in the future.

Your auditor will only need to lodge an ACR notifying us of the breach if it meets the ACR reporting criteria. For most funds, the criteria will be met if either:

a) the auditor has identified the same breach in a previous income year and it has been repeated in the current income year; or

b) it is a breach from a previous year that remains unrectified at the time of audit.

However, the criteria may also be met if the fund is less than 15 months old and the value of any single breach exceeds $2,000.

3. With $1Bn in Cryptocurrency and Non Fungible Tokens in SMSFs, how are they covered in an investment strategy?

Apart from related party investments there are no limits on what a SMSF can invest in, but it must be within the fund’s investment strategy.  The LightYear Docs investment strategy specifically covers NFTs and crypto currencies.  These are both speculative investments.  One of the main areas for an SMSF auditor is in whose name is the NFT or Crypto registered in as many exchanges do not recognise trusts and definitely not SMSFs.  So, if it is in another person or just the entities name there needs to be a document called Declaration of Trust sighted in the audit proceedings. Or else the investment is outside the investment strategy and a breach of section 52B(2)(f).

4. If a SMSF Administrator provides a document that does not cover all of the above, what are the downsides for the SMSF professional?

If the document prepared by a SMSF administrator is NOT an investment strategy and let through by the auditor then there is a breach of the governing rules of the Fund.  This allows the members to sue the administrator and auditor for ALL investment losses arising in the fund. The only defence is that the investment is in line with the Fund’s investment strategy but if there is NO investment strategy then there is no statutory defence.  This is not a negligence issue but a breach of the SIS Act 93.