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SMSF Investment Strategies: Stay Ahead of the Audit:
 
 
   

SMSF Investment Strategies: Stay Ahead of the Audit

News | Navjot Kaur | Released: 06/08/2025 | Read: 5 Mins

A well-drafted and regularly updated investment strategy is one of the most important compliance obligations in any SMSF. It’s not just a formality — it forms the foundation for how the fund’s assets are managed in line with members’ retirement goals and legal requirements.

 

Both the Australian Taxation Office (ATO) and SMSF auditors place strong emphasis on ensuring investment strategies meet the requirements of the Superannuation Industry (Supervision) Regulations 1994 (SISR) and the SIS Act.

 

Failing to maintain a compliant investment strategy can result in audit qualifications (Part B Report), compliance breaches, or even an Auditor Contravention Report (ACR) being lodged with the ATO.
   

Key Components of a Compliant Strategy
   

Under Regulation 4.09 of the Superannuation Industry (Supervision) Regulations 1994 (SISR), every SMSF must have a written investment strategy. A robust SMSF investment strategy should explicitly cover:

  • Diversification: Spread investments across asset classes and sectors to manage risk. Avoid over-concentration in one asset (e.g. a single property or stock) unless the strategy justifies it.
  • Liquidity: Ensure sufficient liquid assets (cash or easily sold securities) to meet expenses and pension payments. Plan for premium payments (insurance, fees) and unexpected cash needs.
  • Risk and Return: Define the fund’s risk tolerance and expected returns. Consider market volatility and match investments to the members’ risk profiles. For example, younger members might hold more growth assets; older members may prioritize capital preservation.
  • Insurance: Document whether members hold life/TPD/Income Protection insurance via super. If not (for example due to age or cost), the strategy should record reasons. Regularly review insurance cover against members’ changing needs.
  • Members’ Circumstances: Tailor the strategy to factors like members’ ages, retirement timelines, contribution levels and health. An aggressive growth strategy may not suit a retiree needing regular income

 

Tip for Accountants: During client meetings, ask trustees to walk through their strategy. Confirm it explicitly addresses the items above. Use a checklist (e.g. diversification, liquidity, insurance, time horizon) to guide discussion.
   

Documenting the Strategy

   
  • Written Format: There’s no single prescribed form, but the strategy must be in writing. Common approaches include formal investment policy documents or strategy worksheets.
  • Record Decisions: Keep meeting minutes or written summaries showing how and when the strategy was reviewed. If trustees decide to deviate from recommended diversification (e.g. concentrating in property), document the rationale.
  • Regular Review: By law, trustees should review the strategy at least annually or whenever circumstances change (e.g. retirement, market shifts). Annual advice sessions are a good time to update the document and have trustees re-approve it.

 

Tip for Accountants: Ensure each SMSF client has a current investment strategy document. If a client’s strategy is vague or outdated, help them formalize it. Store the signed strategy with their other SMSF records for audit and compliance purposes.
   
   

Common Compliance Pitfalls

Accountants should watch for these errors:

  • No Written Strategy: A surprisingly common mistake. If an audit finds no formal strategy, the fund is non-compliant. Always document one.
  • Poor Diversification: For example, an SMSF holding 100% of one stock or a single rental property without adequate cash buffer. Help clients understand regulatory concern over “all eggs in one basket.”
  • Outdated Strategy: Using an old strategy despite changed circumstances (member retirement, market downturns). Encourage an annual health check.
  • Ignoring Tax Consequences: Allocating high-income assets to the pension phase can significantly reduce the fund’s tax liability. Be mindful when selling assets — disposing of them within 12 months may attract higher capital gains tax due to the absence of the CGT discount.
  • Breaching Sole Purpose Test: SMSFs must be maintained solely for the purpose of providing retirement benefits to members (or their dependants in the event of death).

 

Tip for Accountants: During audits or reviews, compare actual holdings to the strategy’s targets. If discrepancies appear (e.g. overweight equities), discuss adjustments or document why changes occurred (new market outlook, members changed risk profile, etc.).
   

Non-Traditional Investments Require Extra Scrutiny

   
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  • Cryptocurrency: SMSFs can invest in crypto, but ATO scrutiny is increasing. Advise clients that crypto assets are highly volatile and often difficult to value and custody securely. If trustees include crypto, the investment strategy should explicitly allow such investment. Also ensure clients keep detailed transaction records for capital gains tax reporting.
  • Property and LRBAs: Property remains popular in SMSFs, especially via Limited Recourse Borrowing Arrangements (LRBAs). Remind clients to factor cash flow for loan repayments and unexpected vacancy/rent issues when setting strategy. The investment strategy must explain:
    • Why a large property investment is appropriate
    • How the SMSF will manage loan repayments and liquidity
    • Whether the lack of diversification is justified based on members' profiles
    • Compliance with LRBA rules and in-house asset limitations
  • Other Alternative Assets: Trustees sometimes consider collectibles (art, cars, wine) or offshore investments. These carry special rules. For example, collectibles must generally be sold within 7 days, and fund-only insurance might be hard. If SMSF invests in international equities or managed funds, ensure these are properly licensed products. The strategy should mention any unique risks (currency, geopolitical) and how they’re managed.

 

Tip for Accountants: Review any non-traditional investments carefully against SMSF rules. Make sure the investment strategy justifies holding them and addresses any special compliance issues (valuation, liquidity, related-party).
   

Join my webinar on 27th Aug- SMSF Deeds, Sole Purpose & Crypto Explained

 

Date: Wednesday, August 27, 2025

Time: 2:30 PM to 3:30 PM

Cost: $50

CPD: 1Hour
   

Case Study: When Lack of Diversification Triggers ATO Attention
   

Scenario:

Jack and Rose, trustees of their SMSF, invested 90% of the fund’s assets into a single residential rental property using a Limited Recourse Borrowing Arrangement (LRBA).

Issues Identified:

 

  • Over-concentration risk: The fund’s assets were heavily reliant on a single property.
  • Liquidity shortfalls: A vacancy period would leave the SMSF unable to meet ongoing obligations such as loan repayments, insurance, and other expenses.
  • No buffer for emergencies: The fund lacked adequate cash reserves to manage unforeseen costs or market shifts.

 

Outcome:

The ATO raised concerns during audit, citing the SMSF’s failure to demonstrate adequate diversification. The trustees were instructed to review and update their investment strategy, clearly documenting how their asset allocation aligned with the fund’s risk profile and retirement objectives.
   

Annual Review & Audit Prep

   
  1. Strategy Refresh: Schedule a yearly review meeting before the SMSF audit. Update the strategy for any new goals or market changes.
  2. Performance Check: Measure actual asset performance against expectations. If returns are falling short, the strategy may need recalibration.
  3. Documentation Audit: Ensure minutes show the strategy was reviewed and signed off. Collect all supporting docs: valuations, reports, trustee sign-off.
  4. Compliance Checklist: Use tools like the ATO’s SMSF ‘Five-Minute Check’ or industry checklists to confirm all strategy components are covered.
  5. Tax and Audit Prep: Remind trustees to keep proof of income, expenses, and investment purchases/sales. Gather crypto exchange statements and property loan documents well before the audit.

 

Tip for Accountants: Maintain a brief checklist for each client: 1) Strategy document exists and dated; 2) Current valuations noted; 3) Insurance status reviewed; 4) Minutes of review available. This speeds up audits and demonstrates professionalism.

 

By staying on top of these requirements and instilling good habits in SMSF trustees, accountants can greatly reduce compliance risk. Prioritize clear documentation and regular dialogue with clients – this ensures the SMSF investment strategy remains solid, compliant and aligned with members’ retirement goals.
   

 

 

 

 

How can we help ?
   

At Trustdeed, we support accountants by ensuring every fund begins with a compliant, generic and audit-ready investment strategy. This allows SMSF trustees to get started quickly, make initial contributions, or roll over funds.  We provide Investment Strategy for –

 

  • New SMSF Set up
  • SMSF Update
   
   

Visit www.trustdeed.com.au for more details or call us on(02) 9684 4199
   

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