SMSF Auditor Being Pedantic on Investment Strategies? Why this might be a good thing – Part II
In the first article, we looked at the dictionary definitions of “formulate” and “give effect to”, as contained in SIS Reg 4.09. Now, we’ll look at why the ATO’s views will help fund members to achieve a better outcome. The issue I have with many off the shelf or FP prepared strategies, is that firstly the trustee isn’t the one formulating, reviewing and giving effect to. Someone else prepares it and they said “yes, that’s great, I agree”. No drama getting someone else to help out, but the trustees ultimately are responsible.
Our dear friend the late (or otherwise) Melissa Caddick has put into perspective the need for trustees to be aware of what is happening with their money and this includes SMSFs. Especially if the FP is then implementing the strategy, courtesy of doing the investing, especially with access to the SMSF’s assets. This is a risk, not just an audit risk, but a risk for the trustees. It’s their money, they should be the ones who know what’s going on. This is one reason why I don’t have an issue with the ATO having a stricter interpretation of Reg 4.09. Ultimately, the trustees will bear the responsibility of the outcome, and anything where that’s been outsourced a little or a lot via the FP will still affect the members of the fund trustees. This isn’t to say that FPs are all like Melissa Caddick, just that the client’s risk has to be viewed through the optics of anyone with access to the accounts of the fund, and the ability to transact and invest the fund’s assets. Back to formulate and give effect to.
Most strategies prepared in a cookie-cutter environment focus on asset ranges, but often have lines such as “the fund will have sufficient liquidity to meet liabilities when due” and “the trustees have considered insurance and will ensure members have correct type and level of insurance”. Now, if you took your car to the mechanic and they said to you “I will consider ensuring your car is able to be serviced” to you, you’d take your car somewhere else. You either are servicing my car or you are not. As Yoda says “There is do, or there is do not. There is no try”. There is “formulate, or there is no formulate. There is no consider”.
The considering should have been done before pen hit paper/fingers hit keyboards. Your investment strategy is the document that says what you have done *after* your considered your decision. It doesn’t contain the consideration. A proper investment strategy should say “the trustees have decided that we don’t need insurance, because the members are of an age where it is not necessary”, or “the trustees have retained life insurance in their existing industry super fund”. That is a decision, that is formulating. The giving effect to, is the actual doing, which by the time the auditor has your fund for audit, should have been done. If they’ve considered, and decided to get insurance, there should be a policy in the fund. In the next instalment, we’ll see why this helps trustees.
