The real cost of unlisted SMSF assets

Have you ever considered setting up a Self Managed Superannuation Fund (SMSF)?

One of the many reasons people may choose to do this is to access investment types that are not available within retail funds, such as unlisted companies and trusts.

However, something that is not generally considered, is the potential ongoing costs and complications in obtaining sufficient audit evidence for these types of investments.

All superannuation assets are required to be shown at market value. You may find this legislative requirement challenging, especially when your SMSF has invested in unlisted assets such as unlisted unit trusts and companies. As the market for these assets is often limited and trades occur infrequently, verifying the market values of these assets may not be a straightforward process.

Recent court decisions have held SMSF auditors liable for not adequately investigating the recoverability of unlisted investments and determining their appropriate market values. Your SMSF auditor may consider the valuations of unlisted assets to be a high-risk area for the audit and may require more evidence from you to support the valuation and recoverability of these investments.

There are also other reasons why it is important to ensure that asset valuations are kept up to date, including:

• Determining the Total Super Balance of each member (which affects the member’s ability to make non-concessional contributions and ability to use the bring-forward-provisions);
• Determining the value of assets supporting a member’s pension (which affects the minimum pension requirement each year);
• Ensuring that the member’s Transfer Balance Cap is not exceeded when moving assets from the accumulation phase to pension phase; and
• Ensuring that any assets acquired from or transferred to related parties are at arm’s length.

When assessing the market values of unlisted assets, there are several types of supporting evidence that your SMSF auditor would look for, including:

• Signed and audited financial statements for the entity;
• A property valuation, where a property is the only major asset held in the entity;
• An independent valuation of the assets held in the entity. If this cannot be provided, then the auditor may accept a trustee valuation from the SMSF trustees provided that objective and verifiable data was used to support the valuation. They will also need to understand the valuation method used and any assumptions that were made.
• A written verification from a director of the entity (must be from an unrelated party).
• Dates and prices of recent sales or purchases of shares/units in the entity between unrelated parties
  

If your SMSF auditor is unable to obtain sufficient and appropriate audit evidence to confirm that the assets are valued at market value and the assets are considered material, they may be required to issue a qualified audit report.

They may also be required to report the contravention to the ATO in an Auditor Contravention Report (ACR) if the reporting criteria are met. Depending on the nature and circumstances of the breach, this can result in adverse outcomes for the trustees, and may potentially even result in severe penalties being imposed.

Investing in unlisted investments can often present significant audit challenges, so before SMSF trustees decide to invest in this particular asset class, they need to become aware of the additional time, work and costs involved in meeting the annual compliance requirements for these types of investments.

Would you like assistance with meeting your SMSF audit obligations? If you have unlisted investments in your SMSF or are considering investing in one, please contact your advisor.