Unlisted SMSF investments – auditor collaboration is key
Promoted by Evolv Super
Daria Galstyan CA, Associate Director – Audit at Evolv, explains why unlisted SMSF investments' challenges can be overcome by a collaborative approach between the auditor, administrator, the accounting and advisor.
It’s no secret that SMSFs can invest in a wide variety of unlisted structures. With closely held unit trusts the choices are many and can range from unlisted trusts that focus on holding real property investment or property development, through to investments in less tangible assets such as racehorses or technology related businesses.
While these investments may be the preferred choice of some SMSF trustees, it can be challenging for trustees to provide an SMSF auditor with the relevant information needed to support the investment existence and / or market value and arm’s length compliance.
As the information available varies based on the nature of the investment, to support the investment for audit purposes, where clients are unsure, they should reach out to their auditors and discuss prior to sending the fund for audit. This saves time and avoids frustration for all parties.
Galstyan adds, “Given the need to meet SMSF audit independence obligations from 1 July 2021, the requirements relating to unlisted investments is an area that accountants and advisors must be mindful to address within the superannuation administration process.”
A 2-pronged approach
As Galstyan explains, independent SMSF audit firm Evolv, takes a two-pronged approach when it comes to unlisted closely held investments. This approach forms our information gathering for audit evidencing purposes.
“First, we look to see if the investment involves related parties,” explains Galstyan. “Where SMSF trustees have a majority or controlling interest, the ATO applies a look through approach to support the investment including compliance with SISA/SISR. That is the transactions or arrangements within those underlying investments are reviewed as if they were occurring within the fund itself. The information to support such an investment is usually much more easily obtained by the trustees.”
Secondly, we consider whether the investment of the fund is a closely held significant interest. The information available for such interests is usually much reduced, more formal, and dependent on the interest and the trustee ability to command information.
“We find that this is where a number of clients tend to spend time in obtaining sufficient and appropriate information to support the audit assertions associated with existence, valuation and compliance with SISA and SISR for these investments” says Galstyan.
SMSF auditors need to scrutinise financial information
A closely held unit trust may not need to prepare a financial report and may not need to ascertain a market value for its assets or business. But where it forms part of an SMSF portfolio, the trustees need to determine a market value for the fund’s interest in the investment – as of 30 June in any given year.
“Sometimes it can be very difficult for SMSF trustees to obtain relevant information including the relevant expertise to evidence the market value associated with the funds’ interest at the end of each financial year” notes Galstyan. “The trustees are often provided a set of financial accounts, which they may see as just a set of numbers. The trustees’ main concern in monitoring the investment is often how much they are receiving into their SMSF by way of distributions or dividends, and the long-term value of their investment.
“This is where Evolv’s teams of auditors with access to specialist experts, reviews financial information and looks through the unit trust at the numbers to understand whether or not all the assets on the unit trust balance sheet are at market value, and the appropriateness of this as a valuation basis.”
“Detailed and variable”
Galstyan sums up the difference between auditing listed versus unlisted closely held investment assets in two words: detailed and variable. The scope of information varying based on the materiality of funds interest, and nature of the investment held.
She notes, “When investments are listed, it is relatively straightforward to secure a market value. With investments such as related party unit trust, where property is the underlying asset, our audit team can conduct titles searches, examine lease agreements, ask for valuations to check if these are at market value – and consider arm’s length leasing arrangements.
Where the related unit trust is associated with property development – in addition expect to be asked for sales contracts, agency agreements if a related party builder is involved, development costs supporting contractual documentation including invoices, status of subdivision, and details of financing arrangements.”
Taking the pain out of the process
“Making the audit process easier for our accounting and advisory firm clients is something we continually work on at Evolv,” says Galstyan. “And it really comes down to communication.
“If we know, for example, that a new accounting or advisory firm client has a portfolio of SMSF clients with significant unlisted investments, we take clear steps to explain the documentation to verify investments before the year-end accounts even reach Evolv.
Get organised now for 2021 audits
The key take-out for accounting and advisory firms according to Galstyan, is to get organised now, to support client transition, following mandatory SMSF independence changes commencing 1 July 2021.
“For firms that have been conducting in-house audits, it may be that investment holdings in such assets, were supported for existence a number of years ago at acquisition, and the detailed documentation to support this is not held within the superannuation administration current records.”
“As independent SMSF auditors, Evolv simply can’t take this approach. Yes, auditing unlisted assets may require some work, but by taking steps to prepare now, accounting and advisory firms can enjoy a smooth transition to meet SMSF audit independence requirements that come into force on 1 July.”