Risks of Non-Complying Investment Strategies: What Advisers Need to Know

The ATO has recently written to SMSF trustees holding a single class of assets (especially property with an LRBA), highlighting concerns around lack of diversification and compliance with SIS Regulation 4.09.  SMSF auditors were also reminded of their obligation to review all investment strategies for compliance, not just those holding property.

As a result, advisers are seeing an increase in auditor management letters and audit scrutiny. 

The key takeaway is the ATO is now moving from education to enforcement.

Understanding SIS Regulation 4.09

SIS Reg 4.09 requires trustees to “formulate, review regularly and give effect to an investment strategy” that considers:

• Risk: Are the assets appropriate for the members’ goals?
• Return: Does the expected return justify the risks?
• Diversification: Is the fund overly reliant on a single asset class?
• Liquidity: Can the fund meet its liabilities as they fall due?
• Insurance: Has insurance been considered for each member?

A documented investment strategy alone isn’t sufficient. It must be tailored to the fund’s actual position, asset mix, and member objectives.

Common Red Flags for Non-Compliance

Signs an SMSF may need to update its investment strategy include:

• The SMSF only holds property (especially with an LRBA) with no diversification.
• The investment strategy hasn’t been updated for several years despite major changes in the fund (e.g. member retirement).
• There’s no documented consideration of insurance.
• The strategy is generic and is not tailored to the fund’s investments.

Real-World Example:

Strategy Review in Response to ATO Risk Flags

Scenario:

An SMSF held a single commercial property funded through an LRBA, with no other investments. The investment strategy hadn’t been updated in four years and made only generic reference to diversification and liquidity.

Issue Identified:

The auditor flagged that the strategy lacked detail around how the fund would meet its pension obligations if the property was illiquid or the LRBA was recalled.

Adviser Action:

Working with SMSF Engine, the adviser developed a tailored investment strategy that:

• Explained the fund’s reliance on rental income for liquidity
• Outlined a contingency plan if the tenant defaulted
• Documented the trustee’s rationale for not holding additional insurance, based on the members’ personal coverage

Outcome:

The revised strategy was accepted without an ACR, and the fund remained compliant. More importantly, the adviser strengthened their client relationship by addressing a serious compliance and retirement planning risk.

Advisers should also be aware of SMSF property-related tax considerations, such as claiming depreciation correctly for rental properties.

Compliance Triggers: When Auditors Must Lodge an ACR

SMSF auditors must lodge an Auditor Contravention Report (ACR) if:

• A prior breach of SIS Reg 4.09 hasn’t been rectified, or
• The strategy fails to meet the SIS requirements.

Trustees may face penalties of $6,600 each (for individual trustees) and repeat breaches can lead to escalated enforcement.

When to Review the Investment Strategy

Advisers should prompt clients to review their strategy:

• Annually as part of the year-end review and planning process
• After major changes, such as:
  • Acquisition or sale of a significant asset
  • Establishment or repayment of an LRBA
  • Entry into pension phase
  • Addition or removal of a member

How Advisers Can Proactively Support Their Clients

Use these questions during client reviews:

• “Have your SMSF investments changed significantly in the past 12 months?”
• “Would your fund be able to meet its obligations if a member retired or passed away?”
• “Have you reviewed insurance cover for each member recently?”
• “Does your current investment strategy reflect your retirement goals?”

Quick Guide: What to Watch For in Client SMSFs

When reviewing client funds, watch for these common risk signals:

• The fund holds only property (especially with an LRBA), with no cash buffer
• The investment strategy hasn’t changed despite major life events (e.g. retirement)
• Trustees can’t explain how liquidity will be maintained in pension phase
• Insurance is not mentioned or is clearly irrelevant to the members’ needs

In these situations, advisers should prompt an investment strategy review and consider formal documentation updates, before the auditor asks for it.

How SMSF Engine Supports Accountants and Advisers

SMSF Engine works behind the scenes with accountants and advisers to help ensure SMSF investment strategies are not only compliant but genuinely reflect each fund’s investment profile and member goals.

We assist with:

• Reviewing existing investment strategies for regulatory gaps or auditor red flags
• Drafting fund-specific, compliant strategy documents, not boilerplate templates
• Identifying high-risk profiles, including SMSFs with single assets or ageing members entering pension phase
• Supporting rectification plans and pre-audit documentation to mitigate ACR risk

Whether it’s a second opinion or a full strategy rewrite, our technical team provides practical, audit-aligned advice to help you stay one step ahead of compliance risks and better support your clients in meeting their retirement objectives.

Need a second opinion or updated strategy? Reach out to SMSF Engine team.