Managing a Super Fund as a trustee can have significant complexities, especially where keeping abreast of changes in legislation and audit focus areas.
As trustees of a Super Fund, your SMSF must be audited each year in accordance with the Superannuation Industry (Supervision) Act 1993 guidelines, with the conducting auditor independent from the Fund and the accountant/administrator who prepares the financial documents.
As such, we have highlighted the key SMSF audit areas of focus across this Financial Year, including:
- Market Valuations of Assets, Commercial & Residential Property
- Review of Large Single Asset Allocations
- Pension Commencement Documents
- Commercial Leases
- Related parties within the Fund
Market Valuations of Assets, Commercial & Residential Property
Under SMSF regulations, assets must be valued at market value in an SMSF’s accounts and financial statements each year. SMSF auditors will be required to hold sufficient audit evidence to support the value of a fund’s investments – including documentation verifying correct valuations and that the valuation is appropriate per the nature of the asset.
As such, to avoid potential issues at audit, it is important to ensure that assets (whether commercial, residential property or of another nature) are revalued as at 30 June each year. The ATO has clarified that property valuations can be determined via:
- Independent appraisals from real estate agents;
- Sales contract (where the purchase is recent);
- Recent sales data of comparable property in the area (available for residential property via CoreLogic, Domain.com.au, or realestate.com.au); or
- Net Income Yield of commercial properties / Capitalisation Rates
It is important to note that using a qualified independent valuer is not required, with the above documentation being sufficient as evidence.
Review of Large Single Asset Allocations
Another audit focus for the Financial Year pertains to reviewing shareholdings, where a single asset is a significant percentage of the overall fund.
Where this is the case and is a situation involving real property, SMSF auditors will require an independent third-party valuation to be completed.
Where these assets do not involve property, an SMSF auditor will conduct a spot-check to ensure that the shares are owned by the Super Fund. Additionally, checks may also occur on corporate actions, including mergers, demergers and consolidations within the fund.
Other asset positions (including shares, units or collectibles) require financial evidence outlining their market valuation and ownership. These records should distinguish between personal and business assets, and highlight clear legal ownership by the Self-Managed Super Fund.
Pension Commencement Documents
To start drawing on superannuation within an SMSF, a Fund must first transfer to a “pension” mode. In doing so, allows members to receive pension payments on a regular basis from the SMSF cash account to a personal bank account.
To commence transfer to a “pension” account, documentation outlining the commencement process/date and the terms of the pension must be formulated and held. These documents – called: ‘Pension Commencement Documents’ are often reviewed in an SMSF audit, with the auditor seeking that the information highlights:
- the SMSF trustees and members executing an agreement setting out all of the terms of the pension (this included letters to and from the members);
- the SMSF trustees record their decision to enter into a pension agreement in the minutes - acknowledging conditions of release and the date the pension started
Where you are looking to commence a “pension account”, it is important to contact an accountant or trusted adviser to ensure the appropriate documentation is in place to avoid issues during a future audit.
Commercial Leases
Whilst exemptions were in place to combat the economic effects of the COVID-19 pandemic for SMSFs, a key focus by SMSF auditors this Financial Year identifies funds which hold a commercial property and lease it back to either the trustees own business or a related party.
For those who hold a commercial property within the Super Fund and lease it back to the business or related party, the ATO and ASIC have outlined factors which need to be documented, including that:
- the written lease is current and enforced;
- the terms of the lease are consistent with market / commercial terms;
- the amount of rent and any increases in rent are on commercial / market terms;
- the lease agreement includes appropriate clauses regarding the recovery of unpaid rent and the consequences of unpaid rent; and
- any extension or renegotiation of the lease are documented in writing.
Where changes to these factors have occurred, trustees should ensure they have an extension letter, detailed meeting minutes, or a renewed lease agreement documenting agreement between all parties, the changes, and the reasons for change.
With new legislation in place scrutinising non-arm’s length transactions (for more information refer to our August article – NALI vs. NALE Transactions - Superannuation Update), it is especially important this Financial Year where crackdown on non-compliance can result in hefty financial penalties, that the above is followed and in place.
Related Parties within the Fund
Under the Superannuation Industry (Supervision) Act 1993 (Cth), SMSFs are prohibited from investing in more than 5% of gross assets into related party investments, with failure to comply holding an heightened focus by SMSF auditors. However, some exemptions are in-place for related party trusts under the ATO’s “in-house asset” definition.
Under the “In-House Asset” determination, an SMSF may invest in assets where they do exceed more than 5% of the fund’s total assets. Where a fund exceeds the 5% level, SMSF trustees must ensure a written plan is in place at the end of the income year to reduce the level of investment for the following year.
With increased focus in this area, trustees should engage with their SMSF Accountant or administrator to test the investment parameters and help in drafting their written plan for the forthcoming Income Year. The plan must specify the amount that is above the in-house asset limit and set out what steps will be undertaken to get in line with compliance regulations.
To rectify the situation, a trustee may also be required to dispose of those assets exceeding the percentage benchmark – with failure to do so potentially resulting in significant penalties to the SMSF by the Australian Tax Office.
Other Miscellaneous Issues
Other miscellaneous audit issues to consider involve ensuring what information listed in the share registry matches those within the SMSF account. An SMSF Accountant / Administrator will be able to check this, informing of any issues ahead of an audit and where mitigation is required.
Additionally, bank accounts and data feeds connected to the Super Fund could also be an area of interest during an audit, with auditors checking details and balances are correct as at 30 June.
For More Information
For more information on areas of focus during an SMSF this Financial Year, please contact the Archer Gowland Redshaw office on (07) 3002 2699 | info@agredshaw.com.au.
