SMSF Auditor Being Pedantic on Investment Strategies? Why this might be a good thing.

We all like to paint the ATO as the bad guy. Detached from reality, unrealistic expectations, excessively strict interpretations of the law. As a result, SMSF auditors are often viewed as their lackeys. SMSF Auditors try to paint the ATO as the bad guys, because we are beholden to their interpretations. However, when it comes to investment strategies, the ATO’s crackdown in the last year may be a good thing for trustees. But first, a bit of a quick explanation into Reg 4.09, and how it’s currently interpreted (and indeed what I tell my clients to tell their clients): Reg 4.09 states that trustees must formulate, review regularly and give effect to an investment strategy. This strategy has to cover risk, return, liquidity, cash flow and insurance. This is all very straightforward and has been in place for almost as long as SIS and the Regs have been in place (with the exception of the insurance update and the review update, which came into effect in 2012 – but we’ve had over 10 years to be accustomed to this). The issue is that ATO and, as a result, me as the auditor, doesn’t like the cookie-cutter strategies that are spat out by BGL360, Class and other packages, nor the big long ones prepared by Financial Planners, which go for pages, but don’t often cover these. Why is this the case? It comes back to the ATO’s view of “formulate and give effect to” (SIS Reg 4.09 (2)). Rather than reiterate the ATO’s views or the many articles I point my accounting firms to, I’ll put together my definitions of “formulate” and “give effect to” and how that affects my understanding of Reg 4.09. Formulate: create or prepare methodically (Oxford Dictionary). Synonyms include prepare, map out, put together, draw up. Give effect to: implement, put into practice, make operative. In the next instalment, we will see how these definitions need to inform the manner in which a trustee implements Reg 4.09.