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I received a 4 years of SMSF Audit from an Accountant in Public Practice. SMSF is in Pension Phase. Income tax refund (franking Credits) not showing in Balance Sheet. 4 years total refund is around $200,000. I questioned the accountant and he tells me that its not compulsory to show(accrue) this refund until it is received from ATO. That's what he has been advised by SMSF team of ATO and as per the accountant ATO told him to refer SMSF Instructions Section I Item 17, SMSF Net Assets $100m or less. Prior years Financials prepared on the same basis and previous Auditor has provided Unqualified Audit Reports.
Am I missing something?
I believe that the franking credits should be taken up in the accounts each year. In the same way you would take up the tax liability not yet paid. Consider if a member was going to get paid out on the basis of the balance sheet ( eg marriage breakdown)
their share of the value would be undervalued by the share of franking credits.
this often happens and the auditor doesn't find out until a year later. the auditor could ne held liable by the member who left the fund based on the accounts you audited.
At least I would want a detailed note to each years accounts clearly itemising the expected franking credits. It appears to be a reportable breach which should be clearly noted in a separate paragraph in the audit report detailing amounts. I would issue a contravention report and put the ATO on record.
I would definitely have these in the balance sheets for each year going forward. and have them quarantined year by year so that you could easily track what has gone on. If the refund is owed at the end of the year, but relies on franking credits, it allows you to easily prove to the trustees what is taking place. The fundamental purpose of accounting is to provide meaningful information. I don't understand why you would not want to provide clear information.
The franking credits are a mere expectation until such time as the tax returns are lodged. Bringing them to account in the years to which they relate may impact pension calculations however they are not an asset until such time as the ATO quantifies them.
Hi Shalendra
In my opinion the major issue here is cash vs accrual accounting method. SMSF financial reports are 'Special Purpose Reports' so no requirements for cash or accrual method to be used. However, I do agree that it would be professional to include fr. credits in BS.
You did not mention if franking credits have been accounted for in the tax return or presented in a e.g. dividends schedule?
i agree totally and the ATO are more active in relation to Reg 8.02B for ststaments prepared under subsection 35B(1)
Thank You
Hi Shalendra
My view is the accountant is wrong in that a tax refund owing to a Fund is an asset and should be reflected in the Fund's financial statements.
Further Section I item 17 the Guide to taxation of financial arrangements (TOFA) has no relevance in my view to the accounting of tax credits. The TOFA rules relate to the tax treatment of gains and losses on financial arrangements. These rules only apply to a SMSF if it has assets greater than $100M.
Arguably if the tax asset is not material to the Fund then the auditor would not have to issue a qualification in their audit report.
If the tax asset is not reflected as an asset in the financial statements then the Fund would be in breach of regulation 8.02B of SIS that requires:
"when preparing accounts and statements required by subsection 35B(1) of SISA, an asset must be valued at its market value".
If the Fund's financial statements are not at market value the Fund could also be in breach of Sub Reg 1.06(9A) re the amount of pension required to be paid on an annual basis.
If the auditor is of the view that assets of the Fund are understated by more than $30,000 then this would be a reportable breach and an audit contravention report would need to be lodged.
Thanks
SMSF AAA