.png)
Hi SMSFAAA team,
I am auditing a fund $770,000 total assets at 30/06/2022. The trustee made an investment (through four bank transfers) for a total of $430,000 (recorded as sundry debtors) at 30/06/2022.
The investment felt through and the money was returned in July 2022 ($300,000) and end of April 2023 ($130,000) when I questioned about this investment.
The trustees don't have any documentation regarding this investment. "It appears there is nothing as far as formal documentation for the XX investment. As far as I can tell it was an informal arrangement very early in the process while the idea was being put together, and the funds requested to be returned as the client felt that it was taking too long".
Can you please advise how you would treat this audit?
Thank you in advance.
Yours Sincerely
Hi Jean
As a positive all the money has been returned so assuming the money was not lent to a related party possibly your concerns could possibly just be raised in your management letter (subject to my below comments).
I would raise with the trustees that they need to provide documentation to show that they have complied with section 109 of SIS in that the investments were made and maintained on an arm's length basis. My view is that if such documentation cannot be supplied I would raise a qualification in relation to this section of SIS. My view is that it would not be an arm's length transaction if that amount was invested and there was no documentation to support it.
You should also consider if there has been a breach of regulation 4.09A of SIS that requires assets "must be held separately from any assets held by the trustee personally".
In relation to a high % of assets being in 1 type of investment my view is that if they have a correctly prepared investment strategy & the investment agrees with this (& complies with SIS) then normally there would not be a breach of the sole purpose test.
Reg 4.09 of SIS requires "Trustees must formulate, regularly review and give effect to an investment strategy for the fund".
The investment strategy under this regulation must consider:
"(a) the risk involved in making, holding and realising, and the likely return from, the entity's investments, having regard to its objectives and expected cash flow requirements;
(b) the composition of the entity's investments as a whole, including the extent to which they are diverse or involve exposure of the entity to risks from inadequate diversification;
(c) the liquidity of the entity's investments, having regard to its expected cash flow requirements;
(d) the ability of the entity to discharge its existing and prospective liabilities;
(e) whether the trustees of the fund should hold a contract of insurance that provides insurance cover for one or more members of the fund."
If other members have a view on this query please let the forum know.
Thanks
SMSF AAA