.png)
Hi,
I have been asked to audit a fund where the assets should have been segregated, but they haven’t been. The trustees/members have requested the Accountant go back and rectify the member balances for the last four years (since taking over the fund).
Is this an option and if it is, what process needs to happen? Does the Accountant need to amend the last four years financial statements and annual returns, or can they adjust the balances in the current year? Should the Accountant apply for a private ruling with the ATO?
The Accountant has mentioned to me that the member balances will vary significantly to what’s been reported to the ATO, due to the proposed segregation.
Thank you.
Thanks for the question.
It is assumed that in this context the use of the word "segregation" is not a reference to the method by which a fund's Exempt Current Pension Income is calculated where it has balances both in accumulation and pension phase.
Instead, in the context of this question, segregation is a reference to certain assets of the fund being earmarked as supporting the balance of one member for the purpose of allocating fund earnings, sometimes referred to as investment segregation.
Some initial observations. The deed of the SMSF should allow for investment segregation and investment segregation should also be contemplated in the fund's investment strategy.
The earnings of a fund are to be allocated to fund members' balances on what is referred to as a "fair and reasonable" basis. Refer to SIS Regulation 5.03. If a particular fund member has selected a specific fund asset representing their interest in the fund, it would ordinarily be "fair and reasonable" that the returns on this asset are reflected in that fund member's balance.
Presumably in the scenario at hand, there is at least one fund member whose balance will go down and another fund member whose balance will go up.
Accordingly, there should be a properly documented confirmation that all the fund members had agreed from the outset (in this case, four years ago) that investment segregation was adopted by this fund. Ideally, there are minutes or resolutions of this decision, contemporaneously maintained, that also identify which assets were supporting different fund member interests.
It is preferable to amend the fund returns for the impacted years rather than to adjust the opening members’ balances in the current year. Adjusting balances in the current year is almost certainly going to invite ATO review as the ATO’s systems will reflect an inconsistency between the closing balances in the last lodged fund return to the opening balances of current year return. At least amended returns from the time investment segregation took place will make it clear as to why and how the member balances have changed.