As a lawyer, I do a lot of work advising and representing approved SMSF auditors who are being audited/reviewed by the ATO and/or who have been referred to the Australian Securities and Investments Commission (ASIC).
Accordingly, I paid a lot of attention to certain new statistics the ATO released recently titled “SMSF auditor case outcomes 2023/24”.
ATO referrals to ASIC on the rise
The ATO has indicated its referrals to ASIC are increasing, revealing in the 2024 financial year it referred 45 auditors of SMSFs to the corporate regulator. This compares to 41 referrals for the previous financial year.
The regulator said a further 51 auditors chose to voluntarily deregister following the commencement of ATO compliance activity.
ATO issues identified
The ATO stated the key compliance issues identified included auditors who breached the in-house audit independence requirements and those who failed to perform adequate checks or gather sufficient audit evidence for market valuations, existence of assets, trustee declarations, borrowings and arm’s-length transactions.
ATO announcements compared with practice experience
I certainly do see ATO audits of approved SMSF auditors where the regulator makes allegations regarding each of the various issues listed above.
However, I particularly wanted to emphasise ATO recognition it has identified approved SMSF auditors who have “failed to perform adequate checks or gather sufficient audit evidence for market valuations”.
I thought I might use this as a springboard to mention a few points about the regulator’s view on evidence and market value. With the potential introduction of the Division 296 tax just around the corner, I can only imagine market valuations will become even more important.
For an approved SMSF auditor, ATO webpage quick code reference QC 45566 is very important.This webpage sets out the minimum expectations for an approved SMSF auditor.
Regarding Superannuation Industry (Supervision) Regulation 8.02B (market value), the ATO notes:
“The auditor should check that the trustees have valued all fund assets at market value when preparing the accounts and statements for the fund each income year. They need to determine how the trustees have valued the assets and obtain evidence to support the valuation by:
- obtaining evidence from the trustees to confirm what method of valuation they used to value assets,
- sighting supporting documentation verifying market value of an asset. Evidence must be objective and supportable,
- sighting third-party financial statements to verify that assets such as units in unit trusts, shares and loans are valued at market value. This includes checking that the entity is a going concern and that the assets are recoverable.
A statement in the trustee representation letter or a trustee minute confirming asset valuations is not sufficient audit evidence.”
The ATO then links to a separate, but still quite important, webpage with quick code reference QC26343. It confirms:
“We’ll generally accept your determination of an asset’s value, as long as:
- it doesn’t conflict with this guide or market valuation for tax purposes,
- there’s no evidence that a different value was used for the corresponding capital gains tax event,
- it was based on objective and supportable data.”
In respect of real estate, that page also states:
“Real property
When valuing real property, you may wish to consider using a qualified independent valuer, especially where the value of the property represents a significant proportion of the fund’s value.
When valuing real property, relevant factors and considerations may include:
- the value of similar properties and recent comparable sales results,
- the amount that was paid for the property in an arm’s-length market – if the purchase was recent and no events have materially affected its value since the purchase,
- an independent appraisal from a real estate agent (kerbside),
- whether the property has undergone improvements since it was last valued,
- a rates notice (if consistent with other valuation evidence),
- for commercial properties, net income yields (not sufficient evidence on their own and only appropriate where tenants are unrelated).
Unless the property has been recently purchased by the fund, you should consider a variety of sources to substantiate the market value of real property. Generally, it is not sufficient for valuations to be based on only one item of evidence in the above list.”
Naturally, statements on ATO webpages do not necessarily represent the law or even industry practice. However, approved SMSF auditors should take careful note of them.
Most approved SMSF auditors want to ensure that if the ATO audits or reviews their audit files, the regulator will be quickly satisfied. Closely following and expressly marrying conclusions to ATO webpage guidance can go a long way to achieving this outcome.
Bryce Figot is special counsel at DBA Lawyers.