Deanne Firth, founder and director of Tactical Super, said that having put more than 16,000 funds on notice, the ATO would be monitoring what happens concerning valuations for those funds when they launch their next annual return.
“I would expect, after receiving the letter, the majority of the funds will move asset values, and so the number next year will be significantly smaller, and that those funds that haven’t moved those values will be at high risk of an ATO audit,” she said.
“One thousand SMSF auditors also got a letter from the ATO regarding this issue. The letter reminds auditors that SMSF trustees are responsible for reporting the assets at market value. It continues to remind the auditor about reg 802(B), and if assets weren’t at market value, the requirement to lodge an auditor contravention. It states that if the auditor has audited funds that have the same cumulative value for certain asset classes across at least three income years, then there is a real potential for a problem.”
Firth said the ATO’s focus is on asset classes that it believes have been subject to significant market fluctuations, specifically residential and commercial property. She added that the letter to auditors suggests that if a value hasn’t moved in three years, the asset must not be valued at market value and the auditor hasn’t been doing their job.
“This is subject to asset classes. Term deposits were quite a problem, even loans might not be an issue, but property or an unlisted investment, what’s the likelihood those shares are still just $1 per share farming land that the trustees just can’t get a value for or can’t be bothered?” she said.
“The wording is clear that the auditor’s role is to verify the market value as determined by the trustees, but it also states that you can obtain that audit evidence from trustees or external sources. The most important point here is documenting that evidence and any judgments made in the audit file. Documentation is the key.”
She said auditors who did receive a letter from the ATO need to ensure that the trustees have objective and supportable valuation evidence, not just for those assets that hadn’t moved in three years but for everything, because if the ATO audits the fund, it will look at everything.
“It’s especially important to double-check investment strategies for these funds because that’s another area that funds trip up on when the ATO audits a fund,” she said.
As the ATO did not provide information about the funds in question to those auditors who received a letter, Firth said it may be possible to ask software providers to run a list of funds with the same comparative figures and check every file to ensure the valuation evidence is robust.
“Just because an asset is the same value as the prior three years, it doesn’t mean it isn’t a valid valuation. There are scenarios where there is legitimate evidence as to why the asset hasn’t moved,” she said.
“For example, a deposit on a property where the title hasn’t been issued yet and there has been a delayed settlement. If there is a sunset clause, it’s a valid reason to leave it at the same value being the deposit amount with no capital growth on that property for those multiple years.”
She added there are also funds with loans to unrelated parties such as developers which have a capital repayment at the end of the loan term.
“Once again, the fund may have a loan sitting there for multiple years that has the same value, no reduction, which is legitimately correct.”
