Strong evidence key to private equity valuations

private equity SMSF

Private equity assets inside an SMSF should have layers of evidence to prove their value and that they are not breaching in-house asset rules.

SMSFs holding private equity assets need to ensure they have multiple layers of documentation to prove to an auditor they are not breaching the in-house asset rules when valuing an asset, an SMSF audit expert has advised.

BDO Australia superannuation partner Shirley Schaefer said the valuation of private equity assets – which could be a trust, company, property or business entity – was an area of difficulty for SMSF auditors, particularly those who had picked up new clients in the past year from another auditor.

“With these sorts of investments there is so many different variations and permutations in what these entities do that they can cause some difficulty,” Schaefer said during a presentation at the recent Tax Institute Superannuation Intensive event.

“The main concern is whether they are potentially in-house assets and if there is an exemption to the in-house asset rules for this particular investment, and it is evidence which we need to be able to substantiate the exemption.”

She said the availability of evidence was becoming an issue where SMSFs have changed auditors, particularly where the previous auditor was familiar with the fund but a new auditor required evidence to support any current in-house asset exemptions.

“It is not just a matter of plucking a number out of the air, but about being objective and supportable, and if the client is new, you are going to have to get them to dig for that data or they will wind up with a qualified audit report.”

She said basic documentation for a private equity investment should include the approved financial statements of the investing entity, regardless of whether they have been audited, but unaudited statements will require additional documentation.

“This could include the valuation of any underlying assets, or bank statements, or any other documentation to support the assets held within the entity itself,” she said.

“The other thing is you are going to want see documentation to support ownership and/or control for the in-house assets.

“The type of things we look for in a valuation of these sorts of investment are the purchases and sales of units or shares within the entity over the past 12 months that can help substantiate what the market value is and, of course, they need to be arm’s-length, unrelated sales.”

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