By Alison Hines
In the current economic climate, more and more self-managed superannuation funds (SMSFs) are moving away from traditional listed securities and towards alternative investments, including unlisted companies and trusts.
Given the compliance requirements for SMSFs and their investments, unlisted investments are of higher risk of ATO audit action and non-compliance. The SMSF must ensure that it complies with the following legislative requirements:
- All loans and investments must be undertaken and made on an arm’s length basis;
- All loans and investments must be recognised at market value; and
- The Fund must not invest in or lend money to a related party (some exceptions apply).
Proving that the SMSF has not breached any of the above sections can be difficult with an unlisted investment as the information is often not freely available. As part of our compliance review for SMSFs, we consider the following:
- Review the current financial statements of the unlisted entity for any potential arm’s length issues or related party transactions, including related party lease arrangements, or loans to any related parties;
- Where there are potential arm’s length issues, reviewing all related party arrangements to ensure that they are being done at arm’s length, and can be justified as such. This may include supporting valuations or comparison to other commercial arrangements;
- Where units or shares have been purchased or sold during the year, reviewing the purchase price to ensure that all equity movements have been conducted at arm’s length;
- Ensure that the SMSFs investment can be independently verified, and accurately documented;
- Review the unitholder or shareholder register to determine whether or not the Fund can be taken to have control of the unlisted trust or company;
- Review the current and historical company information to determine whether or not the Funds members or related parties are directors of the trust or company as well as the company constitution to determine if they have control;
- Review the current financial statements and liaise with the unlisted trust or company accountants to determine the current market value of the SMSFs investment;
- Where the unlisted trust or company has investments in other assets, determining whether these have been recognised in their financial statements at cost or at market value, and making adjustments as necessary to the resultant unit price; and
- Where the unlisted trust or company has an investment in or loan to another unlisted trust or company, the look-through approach is applied, and the above items must be reviewed for each unlisted investment held.
There is also the delay in the SMSF meeting it’s reporting requirements as we need to wait for the accountant who prepares the entity to prepare the financial data mentioned above.
So before investing in this asset class, trustees need to be aware of the additional work by us and therefore cost that may be involved, and way that up with the potential upside by making that investment.
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