This was a significant case involving multiple proceedings in different Courts and Tribunals and covering a wide range of SMSF matters including the humble investment strategy which all SMSFs must have in place and which must be understood by the SMSF members.

In the Administrative Appeals Tribunal (AAT) decision of Merchant and Commissioner of Taxation [2024] AATA 1102 (16 May 2024) (Merchant), the taxpayer followed his adviser's advice to proceed with a series of transactions involving his SMSF and family trust, which were found to be in breach of a number of SMSF compliance obligations that the ATO target for SMSF audits.

Broadly these compliance obligations are designed to prevent the SMSF member from funneling out their SMSF's asset values for purposes other than retirement (early access) or placing undervalued or overvalued assets into the SMSF where those contributed assets are owned by the member (non-arm's length or in-house assets).

Here the member sought to crystalise a capital loss on the sale of listed shares from his family trust (which family trust held capital gains from the sale of an underperforming asset to an external buyer for which had been granted a $55 million loan forgiveness within the group) to his SMSF. This was a transaction that can be broadly described as and undervalued asset contribution.

Within the wider compliance obligation issues decided in this case, the Tribunal agreed with all of the ATO’s positions that the SMSF trustee was in breach of: (1) the SMSF investment strategy requirement, (2) the sole purpose (being retirement funding) test; and (3) the prohibition against providing financial assistance to a member of the SMSF. However, the Tribunal ultimately found that disqualification of Mr Merchant as a director would not serve any useful purpose.

There are separate proceedings mentioning Mr Merchant's blame of his adviser for his decision to enter into the series of transactions and including the events leading to his SMSF investent strategy being largely ignored (which can often be the case with SMSFs). 

A key argument of the ATO against Mr Merchant was that his investment strategy was not updated to cover the investments he made in this complex transaction. 

The real estate property percentage setting was at 0% before a real estate asset was obtained, which could have been easily fixed beforehand if the investment strategy was in place and was drafted with the realities of SMSF lifetime investment progression in mind (e.g. diversification of assets takes time to build and doesn't happen overnight).

An investment strategy should be easily updated and sufficiently broad to allow for you to freely make prudent SMSF investments - it should be facilitative and not hindering or not easily understood. 

It is a simple question to your adviser - is this investment in accordance with my investment strategy?