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I have a client that has invested in an unlisted unit trust and is not a majority holder. The unit trust is involved in gathering funds from various entities, not limited to superfunds, with the purpose of engaging in property developments (subdividing, building, etc.)
The issue I am experiencing is trying to determine a market value for the units held by the fund as the development is currently in progress and the financials provided reflect everything at cost. No evidence has been provided to explain how far into the project they are or when they expect development to be completed.
I am inclined to raise an issue around SIS S.62 - Sole purpose test, but with little information available I'm not sure what to do in this instance. Is a declaration from the trustees of the unit trust sufficient?
Hi Tommy
I assume the investment is a material investment. A declaration from the trustee in this instance would not normally be sufficient.
From a financial audit my view would be that you would need to issue a financial qualification unless you are able to verify the value of the units in the Trust.
In relation to the compliance audit re the investment in the Trust you would need to consider re SIS:
1) Section 62 - sole purpose test.
2) Section 65 - loan money / financial assistance to members.
3) Section 109 - arm's length investment.
3) Reg 4.09 - investment strategy.
4) Reg 8.02B - asset must be valued at its market value.
If you have requested information from the trustees re the valuation of the asset and nothing has been provided you should also consider SIS section 35(C)(2) that requires:
"The trustees must provide the auditor with the necessary documents to complete the
audit in a timely and professional manner; and within 14 days of a written request
from the auditor".
If the investment has been made on an arm's length basis (with an unrelated party) and agrees with the Fund's investment strategy the main focus in my view should be on making sure that the asset is valued at its market value. My view would be to qualify on Reg 8.02B if no documentation has been provided (after being requested) to support that the asset is valued at its market value.
I would also raise any concerns in the annual management letter to the trustees.
If other members have a view as to how they would approach the audit issue please let the forum know.
Thanks
SMSF AAA