Unit trusts tipped to see increased auditor scrutiny
SMSF auditors are expected to take a stricter approach with related unit trusts next year and request more extensive evidence than previously, according to an SMSF audit firm.
Speaking to SMSF Adviser, Tactical Super director Deanne Firth said one of the areas where auditors perhaps haven’t been getting sufficient evidence in the past is unit trusts, particularly those with related parties involved.
“Where you’ve got a related unit trust, that’s where auditors really need to see the bank statements and some of the expenditure. That information isn’t available on a data feed so auditors need to see the actual evidence,” said Ms Firth.
While trustees will often supply the financial statements for the unit trust, Ms Firth said the auditor may actually need more than that where it's a related unit trust.
Ms Firth said this is one area in particular where SMSF professionals and trustees may see auditors become more stringent with what evidence they request, particularly with the ATO and ASIC scrutinising what evidence auditors have obtained when undertaking SMSF audits.
In a recent online article, documentation provider SuperCentral said that SMSF trustees planning to use unit trusts as a way of investing in developments or making large purchases need to be careful they don’t fall foul of the rules.
SuperCentral said that the government regulations prohibit SMSF trustees from using their super to invest in their other businesses or investment schemes, their family’s business structures or other investments where what they are doing is supporting the investment because of the relationship rather than adopting an independent and objective investment assessment.
“Assets controlled by people, companies or trusts that are ‘associates’ of the member are in-house assets,” SuperCentral explained.
“The definition of ‘associate’ in the legislation is eye-wateringly complex and designed to throw the net as wide as possible to avoid the ability to side-step the rules. A super fund cannot invest more than 5 per cent of its total value in ‘in-house assets’.”
SuperCentral warned that a unit trust will be considered to be a related trust if the super fund gains control of the unit trust.
“The unit trust will be a related trust if the super fund controls the unit trust. The concept of ‘control’ is very strictly and broadly defined as well,” it explained.
If the super fund for example holds more than half of the units or has more than half the votes at unitholder meetings it will be said to control the unit trust.
Aquila Super partner Chris Levy has also previously cautioned trustees on some of the dangers of using these sorts of structures for property development or other investments.
Mr Levy said SMSF professionals and trustees need to ensure that investors are not caught by the related party rules of Part 8 ensuring that the SMSF’s investment will not be classified as an in-house asset.
The SMSF trustees will also need to ensure that all parts of the transactions within the trust are at arm’s length and that there is no danger of non-arm’s length income tax penalties being imposed, he added.
“[They also] need to ensure that the proposed investment satisfies the sole purpose test and the fund’s investment strategy,” he said.
