There are four key preparation considerations that will help keep your SMSF auditor happy.

1. Documentation: Ensure that you have ALL documents for the year, including bank statements, expense invoices, share documentation, etc.
2. Valuations: You must consider the need to record your assets at market value each year. We can help you with what you should keep in mind or what is considered appropriate evidence, but you will need to have documentation to support your opinions or assessments about market value.
3. Strategy: Make sure your investment strategy is up to date and reflects the investments and transactions of the fund. All SMSF investment strategies are required to consider the personal circumstances of each and all members, and the trustees must ensure the investment strategy is implemented as recorded during the year.
4. Record of changes: If there have been changes to the SMSF membership during the year (such as the death of a member, a divorce or separation, adding a new member, or rolling out a member), you must ensure that all decisions have been recorded and that appropriate legal documentation has been obtained to make any decisions effective.

The more information provided upfront to your auditor, the less queries the auditor will have when conducting the audit, but if in doubt, ask your accountant to obtain a checklist from your fund’s auditor.

Common audit ‘problem’ areas and challenges

Property investments

Property, whether it be commercial or residential, is a common form of investment for SMSFs. The biggest issue for auditors regarding property is the valuation of the asset. Trustees must ensure that all SMSF investments and assets are carried at market value every year, which requires an annual assessment.

If you don’t believe the value of your property has changed in the past 12 months, then confirmation from a property agent or valuer will help assure the auditor that this is appropriate. Remember, your auditor is not a property expert and if you do not provide appropriate information for them to form an opinion, they may need to source information themselves which could add to the cost and length of the audit.

The ATO has advised that they will be targeting SMSFs where asset values remain unchanged for the past three years. They have already completed mail outs to auditors on this matter and will soon be sending these to trustees.

Non-listed investments

In the past few years, we have seen a surge in private equity investments - whether they are private trusts, companies, or even private debt arrangements - as trustees seek return on investment. There are two aspects of non-listed investments that the auditor needs to consider.

1. Whether the investment is connected or related to the SMSF or its members or relatives. There are restrictions on how much of your SMSF funds can be invested in any assets related to you, the SMSF members, or family members (i.e. entities that you control). To this end, the auditor will need to establish your connection to the investment and whether you and your related parties control the entity the SMSF has invested in.
2. The valuation of private investments can be more difficult. These types of investments are not listed, and often have few transactions relating to them, meaning a market value cannot be easily determined.
   1. If the investment is in a private trust or company, the auditor will require copies of the relevant financial statements of the company or trust, and additional information regarding the valuation of any underlying assets (such as property). It is always recommended that you confirm with the auditor what information they will require to form an opinion on your assessment of the market value of these investments. A trustee minute documenting what the trustees have assessed to form their opinion of value is always a good place to start.
   2. If the investment is a private debt arrangement, then the auditor will need to understand how you have assessed the recoverability of the investment. What factors have you considered to determine that the SMSF monies are recoverable?

Investment strategies

Your investment strategy is a document that guides how you will invest the SMSF assets to provide for your retirement. There are legislated requirements for an investment strategy and, importantly, the auditor is required to check that you have complied with these requirements.

Your investment strategy should include:

• Details of members personal circumstances (age, employment status and retirement needs)
• Risks involved in making, holding and realising - and the likely return from - your fund’s investments with regard to its objectives and cash flow requirements
• Composition of your fund’s investments, including the extent to which they are diverse (such as investing in a range of assets and asset classes) and the risks of inadequate diversification
• Liquidity of the fund’s assets (how easily they can be converted to cash to meet fund expenses such as the cost of managing the fund and income tax expenses)
• The fund’s ability to pay benefits, (such as when members retire and require a lump sum payment or regular pension payments), and other costs it incurs
• Whether to hold insurance cover (such as life, permanent or temporary incapacity insurance) for each SMSF member.

The auditor will also check that the strategy has been reviewed regularly and that the trustees have given effect to the strategy (i.e. that the actual investments match the outlined strategy).

If you are not sure what will be required by your auditor, your accountant or adviser can obtain a specific checklist or guidelines as to their requirements.