Using tax-effect accounting when preparing the financial statements of an SMSF can be of benefit when determining a member’s total super balance (TSB), according to a superannuation technical expert.
The basis of reporting the assets in an SMSF’s financial statements is market value, while the basis for calculating a person’s TSB is withdrawal value, which takes into account the associated expenses of the fund’s assets, SuperConcepts SMSF technical services executive manager Mark Ellem told delegates at the Chartered Accountants Australia and New Zealand National SMSF Conference 2018 in Melbourne recently.
“So one of the aspects that bears thinking about is tax-effect accounting. [It means] bringing to account the paper tax on the paper gain,” Ellem said.
“We have to disclose assets at market value, but if that asset goes up in value, there’s potential for a capital gains tax liability if that asset was sold.
“So to give a true net position to the members, what their balance truly is, we should bring to account that paper tax on that paper gain – this a provision for deferred income tax.”
He emphasised the use of tax-effect accounting for an SMSF will provide members with a more accurate balance with regard to what they will actually receive from the fund and in the event of a member exiting the fund.
“It ensures if there is a split in the fund in a rollout that the member remaining in the fund is not left with the entire tax liability,” he said.
Apart from these benefits, he cited one more advantage from the use of tax-effect accounting.
“It’s also going to help us reduce the member’s total super balance. So here’s accounting helping keep the total super balance of members as low as we can.”
However, he pointed out if an SMSF asset diminishes in value, the fund does not necessarily have to account for a future income tax benefit in the financial statements.
“If we’re going to bring to account a future income tax benefit, we’re going to have to substantiate the market value or the recoverability of that item, which could be quite difficult in substantiating that to an auditor,” he said.
Further, he said an SMSF is not a reporting entity, meaning there is no obligation for them to follow the accounting standards.
“The accounting policies are set by the trust deed and the accounting notes,” he noted.
“So in the accounting notes we can have that we bring to account a provision for deferred income tax, but we do not bring to account a future income tax benefit because of the difficulty in substantiating market recoverability.
“That’s in our accounting notes and that’s what we follow.”