ATO referrals to ASIC are on the arise

The ATO have indicated that their referrals to ASIC are on the arise, stating:

Last financial year (2023–24) we referred 45 auditors of self-managed super funds (SMSFs) to the Australian Securities & Investments Commission (ASIC).

This compares to 41 referrals for the previous financial year.

A further 51 auditors chose to voluntarily de-register following the commencement of ATO compliance activity.

Issues that the ATO identified

The ATO state:

The key compliance issues identified included auditors who:

* breached the in-house audit independence requirements

* failed to perform adequate checks or gather sufficient audit evidence for market valuations, existence of assets, trustee declarations, borrowings and arm’s length transactions.

How the ATO announcements compare with what I see in practice

I certainly do see ATO audits of approved SMSF auditors where the ATO make allegations regarding each of the various issues listed above.

However, I particularly wanted to emphasize that the ATO have stated that the ATO has identified approved SMSF auditors who have ‘failed to perform adequate checks or gather sufficient audit evidence for market valuations’.

I thought I might use this as a ‘springboard’ to mention a few points about the ATO’s view on evidence and market value. With the potential introduction of Division 296 tax just around the corner, I can only imagine that market value will become even more important.

For an approved SMSF auditor, ATO webpage quickcode reference QC 45566 is very important (available at https://www.ato.gov.au/tax-and-super-professionals/for-superannuation-professionals/smsf-auditors/auditing-an-smsf/compliance-audit). This webpage sets out the ATO’s minimum expectations for an approved SMSF auditor. Regarding SISR reg 8.02B (market value), the ATO state:

The auditor should check that the trustees have valued all fund assets at market value when preparing the accounts and statements for the fund each income year. They need to determine how the trustees have valued the assets and obtain evidence to support the valuation by:

* obtaining evidence from the trustees to confirm what method of valuation they used to value assets

* sighting supporting documentation verifying market value of an asset. Evidence must be objective and supportable.

* sighting third party financial statements to verify that assets such as units in unit trusts, shares and loans are valued at market value. This includes checking that the entity is a going concern and that the assets are recoverable.

A statement in the trustee representation letter or a trustee minute confirming asset valuations is not sufficient audit evidence.

The ATO then link to a separate — but still quite important — ATO webpage, which is quickcode reference QC26343 (available at https://www.ato.gov.au/print/section/a2662aee-7f9e-4ca0-9c16-dc3dca4e63ca). This separate ATO webpage states:

We’ll [ie, the ATO] generally accept your determination of an asset’s value, as long as:

* it doesn’t conflict with this guide or Market valuation for tax purposes

* there’s no evidence that a different value was used for the corresponding capital gains tax event

* it was based on objective and supportable data.

In respect of real estate, that page also goes on to state:

Real property

When valuing real property, you may wish to consider using a qualified independent valuer, especially where the value of the property represents a significant proportion of the fund’s value.

When valuing real property, relevant factors and considerations may include:

* the value of similar properties and recent comparable sales results

* the amount that was paid for the property in an arm’s length market – if the purchase was recent and no events have materially affected its value since the purchase

* an independent appraisal from a real estate agent (kerbside)

* whether the property has undergone improvements since it was last valued

* a rates notice (if consistent with other valuation evidence)

* for commercial properties, net income yields (not sufficient evidence on their own and only appropriate where tenants are unrelated).

Unless the property has been recently purchased by the fund, you should consider a variety of sources to substantiate the market value of real property. Generally, it is not sufficient for valuations to be based on only one item of evidence in the above list.

Naturally, statements on ATO webpages do not necessarily represent the law or even industry practice. However, for obvious reasons, approved SMSF auditors should take careful note of them.

Most (dare I say, all) approved SMSF auditors want to ensure that — if the ATO audits/review their audit files — the ATO will be quickly satisfied. Closely following and expressly marrying conclusions to ATO webpage guidance can go a long way to quickly satisfying the ATO.