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State law can cloud investment strategy

SMSF investment strategy

State-based laws could add a layer of complexity to the compliance regarding SMSF investment strategy, according to an industry lawyer.

Having a compliant SMSF investment strategy may not be as simple as adhering to regulation 4.09 of the Superannuation Industry (Supervision) (SIS) Act with some state-based laws also potentially needing to be satisfied, a specialist lawyer has said.

“Almost every State or Territory trustee act has 15 specific criteria that have to be applied to each investment of a trust and an SMSF is a trust. So each for discrete investment trustees are meant to apply a prudent person test,” DBA Lawyers director Daniel Butler said.

“Unless that trustee criteria is excluded it applies and a lot of deeds do not exclude it so you have that criteria to worry about,” he added.

According to Butler, case law makes the situation and the question of trustee compliance even more complex.

“Case law says if you are bulky in one investment you need to express power in the deed because trustees should diversify [their investments],” he said.

“So the bottom line there is the trustee act, there are trust law cases, but there are deeds that have expressed authority [for the trust] to be invested in one asset or one asset class without being pinged as the case law would suggest.”

Butler pointed that out in addition to these considerations advisers, in particular accountants providing financial advice, need to always be mindful of their licensing restrictions before discussing an SMSF investment strategy or decision with their trustee clients.

“Naturally you have to manage the AFSL (Australian financial service licence) as well because if you’re not licensed [you’ll have to determine] how to get your clients into an investment strategy without being involved in the provision of financial product advice,” he said.

Scrutiny over SMSF investment strategies have come to the fore since the ATO issued 17,700 letters to trustees whose funds are invested in either a single asset or a single asset class.

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