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Auditors warned of asset valuation fiddling

SMSFs are expected to distort asset valuations for various reasons as a result of the 2016 budget super reforms, with auditors likely to face multiple risks when going through these funds.

Such was the warning by Super Sphere director Belinda Aisbett, who said her firm had already seen funds trying to manipulate asset balances in both directions.

Speaking at the SMSF Association National Conference 2018 in Sydney last week, Aisbett said many funds had attempted to reduce asset values to reduce member account balances below the $1.6 million transfer balance cap, while one fund tried to overvalue assets to increase the cost base relief.

“We’ve had an SMSF that at 30 June 2016 had a property worth $17 million. Come 30 June 2017 it is magically worth $6.4 million. It probably doesn’t take a calculator to figure out that with their four pension members multiplied by $1.6 million, you come up with $6.4 million,” she said.

“That should ring alarm bells and I know that this is a really extreme example, but this is the sort of thing that clients are going to be looking at.”

Auditors should be aware that funds manipulating asset values to ensure they fall under the $1.6 million cap will increase their risk of being selected for an ATO audit.

Therefore, auditors should obtain more audit evidence, Aisbett warned.

For example, where a property has markedly reduced in value, auditors should request an independent valuation to establish the market value instead of relying on a real estate agent’s appraisal.

“The first thing you should be thinking about is perhaps I need to have a conversation with the person who’s done the property appraisal. Maybe we need to have a conversation that I just don’t want a real estate agent’s appraisal or other supporting documents,” she said.

“You get a real estate agent that says it’s worth $17 million last year and $6.4 million this year, I don’t think it matters what notes I take as to what the explanation is, it’s really questionable.

“And let’s face it, the ATO are going to look at that super fund and go, ‘how convenient, $17 million down to $6.4 million, we might select that fund for review’.”

She also noted that when it came to cost base relief for investments where the trustee was electing cost base relief, many accountants did not have election documents.

“I was sort of hoping the ATO requirements would be a little more specific, but when you fill out the tax return, yes I’m electing the cost base relief, you don’t actually have to nominate which assets,” she said.

She said it had been a challenge to change accountants’ attitudes to convince them about the level of documentation required to provide sufficient evidence on what the trustee was actually doing to affect these changes.

“We say to some accountants we don’t know which assets to check your cost base relief if you do not give us a list of what the client has elected,” she said.

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