One of the problems is that these won’t be the last litigation cases we see concerning SMSFs, with the next cases potentially involving administrators, financial planners or accountants. 

The reason for the importance is that SMSF auditors have changed their processes and procedures which directly impacts the type of information requested at audit.

Both cases rested on the fact the fund had invested in high-risk assets such as loans to unrelated companies and unlisted unit trusts. Still, the auditors had no evidence on file to verify the existence of these assets let alone their market value. 

Why is market value so important?

R8.02B SISR requires that an asset must be valued at its market value. It was included as a reportable contravention in 2014 because too many SMSF trustees had unlisted assets recorded in the financials at cost. 

With the main problem being the value of pension payments not recorded correctly, it also kept in-house asset limits artificially low to avoid exceeding the 5 per cent threshold.

As a result, the focus on market value and the outcome of these cases means that high-risk assets, such as unlisted investments, are now being considered more carefully.

The ATO is now focusing part of their compliance activity on fund asset market valuations. 

Remember, too, that a breach of R8.02B SISR may be reportable to the ATO via an Auditor Contravention Report (ACR) where the breach meets one of the reportable tests set down by the ATO. 

Here’s the type of audit evidence required to determine the market value of risky unlisted assets.

Unlisted company

The types of audit evidence that would be acceptable for an unlisted company includes, but is not limited to, the following:

1. The share price of equity raised in the past 12 months
2. The share price of shares sold in the past 12 months
3. A separate valuation of company assets (including intangible assets) and liabilities with evidence and calculations provided
4. The net tangible asset (NTA) of a company (which is only reliable when the company values its assets in its financial statements at market/fair value — refer to valuation policy in notes to the financial statements)
5. The cost price of shares (only reliable in the first year the fund acquired the shares)

Generally, the cost price and NTA are insufficient valuation methodologies to satisfy R8.02B because a private company prepares special purpose financial statements, and the assets are typically valued at cost or written-down value. 

In addition, a signed copy of the unlisted company’s financial statements is also required as evidence to confirm the company is a going concern. 

Unit trust

The types of audit evidence that would be acceptable for a private unit trust includes, but is not limited to, the following:

1. The unit price of new units issued in the past 12 months
2. The unit price of units sold in the past 12 months
3. Separate valuation of unit trust assets (e.g. property) and liabilities with evidence and calculations provided
4. NTA of unit trust (only reliable when the unit trust values its assets in its financial statements at market/fair value — refer to valuation policy in notes to the financial statements)
5. The cost price of units (only reliable in the first year the fund acquired the units)

Once again, the cost price and NTA are insufficient valuation methodologies to satisfy R8.02B as the private unit trust prepares special purpose financial statements, and the assets are valued at cost or written-down value. 

In addition to the above, a copy of the private unit trust’s signed financial statements is required as evidence to confirm the financial position.

ATO valuation guides

The ATO has published the following two guides on their website to assist SMSF trustees when valuing fund assets:

1. Valuation guidelines for self-managed super funds – QC 26343
2. Market valuation for tax purposes – QC 21245

The valuation guidelines provide a checklist for obtaining valuations for risky assets and how they must be valued. 

The ATO suggests the use of a qualified independent valuer where the value of an asset represents a significant proportion of the fund’s value or the nature of the asset indicates that the valuation is likely to be complex.

Conclusion

It’s critical to ensure that SMSF auditors are vigilant about checking the market valuation of risky assets to reduce potential litigation risk for all SMSF professionals. 

There’s no value in paying for a professional SMSF audit service that ends up costing in the long run.

ASF Audits is the home of one-click SMSF auditing. Contact Ben Atkins on 1800 27 872 for more information.

© Shelley Banton 2020