SMSF auditors looking to ensure a fund meets the sole purpose test should not rely solely on the trustee representation letter, but seek more information particularly where expenses are inconsistent with the fund’s investment strategy.
Heffron head of education and content Lyn Formica acknowledged compliance with the sole purpose test could appear to be subjective given each SMSF trustee can choose their own investments, but noted there were structures auditors can use to check the fund has not breached the test.
“It’s not a question that we specifically often ask our trustees and while funds need to have an investment strategy, it doesn’t say they have to record the motivation for their purchases inside those strategies,” Formica said during an online presentation for the Auditors Institute today.
“We don’t always get the full story behind transactions and often we have to rely upon the representation letter.
“Unless there’s something out there that indicates to you that letter just can’t possibly be true, we do have to take the trustees word for it.
“I would be mindful of situations where it’s quite obvious why the fund is undertaking a particular investment if I can’t see what the benefit to the fund is. Often it smells and that’s usually our indicator that we might do some further digging.”
She said current day benefits being provided to members or related parties would breach the test and auditors and advisers could identify these by asking what the fund was investing in and if the benefits from that investment went solely to the fund.
Additionally, auditors could examine the level of expenditure related to an investment, such as travel and accommodation to inspect assets, and whether that was appropriate or proportionate.
“You often know the real purpose behind a transaction and the trustee will swear the fund is the only thing who could benefit, but fund expenditure, we might look at it and ask what was that for,” Formica said.
“If I see a heap of money coming out of the fund for a trip to America, [I will ask] what was the purpose of that transaction.
“I will ask some questions about that, but typically wouldn’t question someone’s motivation for undertaking an investment if it’s in accordance with the fund’s investment strategy and has complied with the other [superannuation] rules.”