Deanne Firth, director of Tactical Super, said on the most recent SMSF Adviser podcast that auditors are more often finding it difficult to get adequate evidence from trustees that a loan has been repaid.
“If you’re going to loan someone money, or a business money, and a lot of the time they’re not secured, auditors need some form of evidence – not just that the recipient has paid the interest payments on time,” she said.
“We need to know that that loan is recoverable, but usually the businesses don’t have or won’t give that financial information to the trustee, who then passes it on to us. It is an area where auditors end up with a lot of reg 802B auditor contravention reports just because they can’t see that the loan is recoverable.”
Firth added that it is best that if an SMSF is lending money, the trustees obtain some security on the loan.
“Then at least, if you’ve got security over a property, it’s pretty easy for the auditor to run a title search check stating there is a charge on the asset and that there are no other loans on it.”
“We can tick our box and move on with the audit.”
Firth said in the lead-up to 30 June, auditors are also looking closely at valuations and often find difficulties valuing unlisted assets, especially if it is a private company that may be doing something unusual.
“A lot of times we try to get people to see if they can find an example of a similar business such as accounting firms. We all know there’s a rule of thumb valuation for accounting firms and that then makes valuing them with the evidence easy,” she said.
“If you can get some kind of evidence that shows whatever industry that the business may be in has some rule of thumb valuation basis, or even if they’ve had a valuation done prior and it shows the way that they worked it out, then at least the fund doesn’t have to pay for those expensive valuations on an annual basis. They can use the same formula in order to get that evidence. The net asset value just does not cut it at all anymore.”
Aaron Dunn, chief executive of Smarter SMSF, added that as it is popular for SMSFs to invest in start-up ventures, valuation can often be done by looking at the price history.
“Looking at transactions would also play a role if they’ve gone through a round of capital raising that may have happened within a finite period,” Dunn said.
Firth said if an SMSF has sold shares or units to an unrelated party near the end of the financial year, it can make exceptions to accepting the valuation.
“That does help. If [the business] has done capital raising or even if it’s just after the end of the financial year, it does help with the valuation,” she said.
“It’s the ones where they’ve invested early and haven’t taken any additional capital that make it tricky.”
She continued that with the introduction of Div 296, valuation and its evidence will become even more important.
“Theoretically, you could say this is the value, but we can’t get the evidence. The auditor lodges an ACR, and then the Tax Office might look at it and determine Div 296 is applicable, so it will have a closer look at the valuation.”
“Up until this point, the solution has been that if you can’t get the evidence, you just move on and get it for next year.”
