Audit of SMSFs

SIS Compliance
SMSF Administration

Presented by:
Shirley Schaefer FCA
Director
BDO Audit (SA) Pty Ltd
Agenda

• SMSF Administrative
Requirements
• Definition of a SMSF
Legislative Requirements

• Definition of a SMSF (s.17A)

• Trustees & Members
• Less than 5 members
• All members must be trustees & all trustees must be members
• Corporate trustees – directors of trustee company
• Members cannot be an employee of another member (unless a family
member)
• Trustees cannot be remunerated for acting as a trustee
• Exemption for those providing services to others (s.17B)
• Must be provided at arms length rates

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Legislative Requirements

• Definition of a SMSF (s.17A)

• Single member funds
• Individual trustees – must have 2
• Corporate trustee – can be a single director company
• Doesn’t matter who the shareholders are

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Legislative Requirements

• Replacement Trustees
• EPOA or LPR
• Outgoing trustee must resign (unless deceased or no capacity)
• Incoming trustee must be appointed
• Consent to act
• ATO trustee declaration (within 21 days of appointment)
• Notify ATO within 28 days of changes

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Legislative Requirements

• Trustees cannot be a disqualified person (s.120)

• Disqualified person has been:
• Convicted of an offence of dishonest conduct
• Received a civil penalty order under SIS
• An insolvent under administration

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Legislative Requirements

• Disqualified Trustees (s.126K)

• Immediately notify the ATO in writing
• A disqualified person cannot appoint their LPR to act in their place
• If cannot be a trustee of a SMSF – cannot be a member of a SMSF

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Legislative Requirements

• Disqualified Trustees - what to do?

• Must rollout benefits from SMSF within 6 months
• Transfer to a retail fund
• Transfer to a SAF
• Eligible to withdraw monies

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Legislative Requirements
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• To be eligible for income tax concessions, the SMSF must

• Be a resident regulated fund
• Be an Australian Superannuation Fund
• Comply with ITAA provisions
• Eligible for 15% tax concessions

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Legislative Requirements

• Fund will only be eligible if it is an Australian Superannuation Fund

• Established in Australia; and
• Residency of the fund
• Central Management & Control; and
• 50% active members

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Legislative Requirements

• Residency
• 50% of active members must be residents
• active members = contributions or rollovers; or
• No active members
• Central Management & Control (CMC)
• Formulating investment strategy
• Reviewing performance
• Determining how assets used

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Legislative Requirements
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• Residency
• Connected to tax payer residency
• Once a member has made a decision to permanently depart Australia, the
fund is no longer a resident SMSF
• If a member has temporarily departed Australia, then the CMC will be
considered to remain in Australia if the absence is less than 2 years
• The 2 year rule doesn’t apply if the member has permanently departed Australia
• There is no ‘re-setting’ of the 2 year rule

ATO will not take compliance action where residency

cannot be met due to COVID 19

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Fund Administration

• Minutes & Records (s.103)

• To be retained for 10 years

• Changes of Trustees(s.104)
• Records of changes of trustees
• Trustee Consents (s.118)
• To be retained for 10 years

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Fund Administration

• ATO Trustee Declaration (s.104A)

• To be signed within 21 days of appointment
• To be retained for 10 years

• Beneficiary Reports (s.105)

• To be retained for 10 years

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Fund Administration

• Accounting Records (s.35AE)

• Maintenance of records to allow financial statements to be prepared
• Kept in English
• Kept for 5 years

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Fund Administration

• Accounts & Statements (s.35B)

• Prepared & signed by at least 2 trustees
• Include a balance sheet & income statement
• Kept for 5 years
• Electronic/Digital signatures
• Using a secure system (PIN number, access code or password to access)
• Must clearly identify the trustee signing & indicate approval

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Fund Administration

• Market Value (reg 8.02B)

• Assets must be carried at market value
• Annual requirement (financial statement preparation)
• Market value is:
• the amount that a willing buyer of the asset could reasonably be expected pay to
acquire the asset from a willing seller if all the following assumptions were made – that
the:
• buyer and the seller dealt with each other at arm's length in relation to the sale
• sale occurred after proper marketing of the asset
• buyer and the seller acted knowledgeably and prudentially in relation to the sale

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Fund Administration

• Valuation Guidelines
• No requirement for independent valuations in relation to preparation of
financial statements
• Trustees can conduct valuations, it must be based on ‘objective &
supportable’ data
• ATO recommends independent valuations where the asset makes up a significant
portion of the fund’s assets or it is a complex investment
• ATO is concerned about manipulating valuations & valuations of complex
arrangements with related parties

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Fund Administration

• Market Valuations
• The trustee must be able to demonstrate that the valuation has been arrived
at using a 'fair and reasonable' process.
• It takes into account all relevant factors and considerations likely to affect the
value of the asset.
• It has been undertaken in good faith.
• It uses a rational and reasoned process.
• It is capable of explanation to a third party

DOCUMENTARY EVIDENCE
NOT JUST HOW – BUT WHAT HAS BEEN RELIED ON

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Fund Administration

• Valuation Guidelines
• Listed/public securities
• closing price on each listed security's approved stock exchange or licensed market at
30 June

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Fund Administration

• Valuation Guidelines
• Real Property
• the value of similar properties
• the amount that was paid for the property in an arm’s length market
• independent appraisals
• whether the property has undergone improvements since it was last valued
• for commercial properties, net income yields
• a valuation undertaken by a property valuation service provider, including online
services or real estate agent would be acceptable

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Fund Administration

• Valuation Guidelines
• Unlisted securities - need to take into account a number of factors that may
affect its value including:
• value of the assets in the entity
• financial statements available?
• are they audited?
• how can the auditor verify underlying assets?

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Fund Administration

• Valuation Guidelines
• Unlisted securities - need to take into account a number of factors that may
affect its value including:
• consideration paid on acquisition of the unlisted securities or units
• recent purchases/sales of the securities
• income stream from the investment (price/earnings ratio)
• liquidity
• remember the trustees are valuing the securities not the underlying assets

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Fund Administration

• Valuation Guidelines
• Collectibles – reasonable valuation?
• When was the asset acquired
• How is market value determined
• Use of experts may be necessary

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Fund Administration

• Case Study Foxes Super Fund

• Property Value $950,000
• Annual property income (rental) $780,000
• Valuation?
• Arms Length

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Fund Administration

• Case Study Foxes Super Fund

• Type of Property – Waste Depot
• Income from arms length operator (based on %age of revenue)
• Valuer General’s Assessment $950,000

• Any independent valuations?

• Term of contract?
• Impairment of property values?
• Will it be a liability at completion?

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Fund Administration

• Case Study Twill Super Fund

• Investment in Twill Property Trust (sole asset of the property trust is
commercial property)

Twill Super
Fund
Twill Property
Trust
Commercial
Property

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Fund Administration

• Case Study Twill Super Fund

• Investment is in a Unit Trust
• Need to value the units
• How would prospective purchasers look to value the units?
• Look to underlying assets in this case – property
• As a single unit holder, essential SMSF holds property (just through an interposed
entity)
• Same valuation considerations as commercial property

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Fund Administration

• Case Study Tweed Super Fund

• SMSF has investment in Twee Wines Pty Ltd
• No dividends for past 5 years
• Company making operating losses

Tweed SF (20%)

Shareholder 2
Twee
Wines Shareholder 3

Pty Ltd Shareholder 4

Shareholder 5

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Fund Administration

• Case Study Tweed Super Fund

• Valuation of shares
• Underlying assets have value
• No income stream to shareholders
• How to value shares?

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Fund Administration

• Case Study Tweed Super Fund

• Trustee valuation based on:

Foreign company Company has Deal not yet

has offered $26 issued complete
per share for 49% convertible
of shares of the notes at $26 3rd foreign
company per note deal on the
table

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Fund Administration

• Case Study Tweed Super Fund

• Trustee valuation based on:

Foreign company Company has Deal not yet

has offered $26 issued complete
per share for 49% convertible
of shares of the notes at $26 3rd foreign
company per note deal on the
table

• Value adopted $13 per share (discount of 50% for uncertainty/risk)

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Fund Administration

• Auditor Requests (s.35C(2))

• Written request by the auditor to the trustee to provide information
• Can only request documents relevant to the audit
• Must respond within 14 days

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Fund Administration

• Member’s Benefits
• Reg 5.03 – investment returns to be allocated on a fair & reasonable basis
• Reg 5.08 – minimum benefits to be maintained (vesting)

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Fund Administration

• Member’s Benefits
• Reg 13.12 – cannot be assigned to a non-member
• Reg 13.13 – cannot register a charge against a member’s benefit

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Fund Administration

• Assets cannot be pledged as security (Reg 13.14)

• General prohibition
• Specific exemption for LRBAs (Reg 13.15)

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Fund Administration

• Audit Evidence – Trustee Rep Letter

• Do we need 10 years worth of records?
• ‘conversation’ with the trustee
• Covers SIS compliance as well as financial statement representations
• Sent to auditor with signed documents or sent after audit conducted?
• Specific tailoring
• Contraventions – get new representation letter or diminishes in value as audit evidence

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Fund Administration

• Audit Evidence – External Sources

• ASIC searches for corporate trustees
• LTO searches
• Personal Properties & Securities Register (PPS)
• Accountants Representations

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Questions

BDO Audit (SA) Pty Ltd

Email: shirley.schaefer@bdo.com.au
Website: www.bdo.com.au

Chartered Accountants Australia and New Zealand

Contact: Tony Negline, Head of Superannuation

Email: superannuation@charteredaccountantsanz.com
Website: www.charteredaccountants.com.au

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