SMSF Investment Strategy: What the Law Requires and How to Get It Right
What is an SMSF investment strategy?
Every SMSF must have a written investment strategy. This is not optional guidance — it is a legal obligation under SIS Regulation 4.09 and reinforced by the trustee covenant in SIS Act s52(2)(f).
The strategy sets out the fund’s objectives for making, holding, and realising investments. It must be formulated, reviewed regularly, and given effect to. A strategy that exists on paper but is not followed is as much a breach as having no strategy at all.
Trustees who fail to prepare and implement an investment strategy face administrative penalties of up to $4,200 per trustee (or per director of a corporate trustee). The ATO can also issue education directions requiring trustees to complete approved training at their own cost.
The five mandatory considerations
SIS Regulation 4.09(2) lists five matters the strategy must address. Each represents both a compliance obligation and a practical planning step.
(a) Risk involved in, and likely return from, investments
The strategy must document the expected return profile and the risks associated with each asset class held. For a property-focused fund, this includes rental yield assumptions, vacancy risk, capital growth expectations, and interest rate exposure on any borrowing. Higher expected returns typically carry higher risk; both sides belong in the written record.
(b) Composition of the fund’s investments as a whole, including diversification
Trustees must consider the degree of diversification across and within asset classes. For a fund holding a single residential property, this means explicitly acknowledging the concentration and recording why the trustee considers it acceptable given the fund’s circumstances. Diversification provides downside protection but can also dilute returns; the law requires consideration, not a specific outcome.
(c) Liquidity of the fund’s investments
Property is inherently illiquid. A sale can take months and carries transaction costs of 2–5% of the property value. The strategy must show how the fund will meet ongoing cash obligations — insurance premiums, accounting fees, loan repayments, and member benefit payments — without being forced into a distressed sale.
(d) Ability to discharge existing and prospective liabilities
This extends beyond liquidity to cover the fund’s total balance sheet. A fund with an LRBA must show it can service loan repayments under normal conditions and under stress scenarios (e.g., vacancy, rate rises). Prospective liabilities include a member approaching retirement who may soon request a lump sum or pension payments.
(e) Whether to hold insurance cover for each member
The strategy must document whether the fund holds (or has decided not to hold) life, total and permanent disability, or income protection insurance for each member. Insurance adds a recurring cost that reduces net returns, but it provides protection against catastrophic events that could force a property sale. The decision either way must be recorded with reasons.
Can you hold 90%+ in property?
Yes. No provision in the SIS Act or Regulations sets a maximum allocation to any single asset or asset class. The obligation under SIS Regulation 4.09 is to consider and document the diversification rationale, not to achieve a specific allocation split.
In 2019, the ATO conducted a targeted campaign, writing to approximately 17,700 SMSF trustees whose funds held more than 90% of assets in a single asset or asset class. The letters did not allege a breach; they reminded trustees of their obligation to consider diversification and to document that consideration. Funds that could demonstrate genuine deliberation faced no further action.
Concentration amplifies both upside and downside. A fund with 95% in a single property benefits fully from capital growth on that property, but also bears the full impact of a vacancy, market downturn, or unexpected maintenance cost. The key is that these trade-offs are understood and recorded, brick by brick.
Check your fund’s concentration
Enter your pre- and post-purchase asset allocation to see how concentration compares with ATO benchmarks. Takes about 2 minutes.
How to document a concentration decision
Documentation is the difference between a compliant fund and a non-compliant one. The ATO looks for evidence that diversification was genuinely considered, not merely that a checkbox was ticked.
The investment strategy itself should contain language showing the trustee has weighed concentration risk. For example: “The trustee has considered the concentration of fund assets in a single residential property and has determined that this allocation is appropriate given [specific reasons].”
Supporting evidence to retain alongside the strategy includes:
- Signed minutes of trustee meetings discussing the strategy
- Cash flow projections showing the fund can meet expenses during vacancy
- Market research or valuation reports considered at the time of the decision
- Correspondence with advisers (accountant, financial planner) on the topic
- Annual review notes confirming the strategy was reconsidered
Records that exist only in hindsight carry less weight. The strongest evidence is contemporaneous — created at or near the time the decision was made.
When to review your strategy
The SIS Act requires the investment strategy to be reviewed “regularly.” The ATO considers at least annual review as the minimum standard. However, certain events should trigger an immediate review regardless of the annual cycle:
- Purchase or sale of a major asset (especially property)
- A member approaching retirement or requesting a benefit payment
- Change in a member’s employment, health, or family circumstances
- Significant market movements or interest rate changes
- New member joining or existing member leaving the fund
- Change in insurance arrangements
Each review should be documented with the date, the matters considered, and whether the strategy was amended or confirmed unchanged. A one-line file note stating “strategy reviewed, no changes” is insufficient; the record must show what was actually considered.
Investment strategy and property
Property introduces specific considerations that the investment strategy must address explicitly. These go beyond the general five-factor framework.
Illiquidity. Unlike shares or managed funds, property cannot be partially sold. The strategy must address how the fund will maintain adequate cash reserves to cover expenses during the period required to sell (typically 3–6 months, potentially longer in a slow market).
Concentration. A single property can represent 70–95% of a fund’s assets. The strategy must explicitly acknowledge this concentration and document the trustee’s rationale for accepting it. Higher concentration increases sensitivity to property-specific events such as tenant default or local market decline.
Insurance of property. Building and landlord insurance are not merely prudent; they relate directly to the trustee’s obligation to protect fund assets. The strategy should note the types of cover held and the sums insured.
Cash reserves for maintenance and vacancy. The strategy should set out the fund’s approach to maintaining a cash buffer. Common considerations include the cost of foreseeable repairs, the likelihood and expected duration of vacancy, and the fund’s capacity to meet loan repayments from contributions alone if rental income stops. Holding insufficient cash is a risk; holding too much reduces exposure to growth assets.