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A fund acquires shares in an unrelated company at $1 p/share. On the same day one of the fund's members is appointed CEO/Director of the unrelated company. The company has 4 other directors and no further share issuances were carried out during the financial year. The issued capital of the company is approximately $100m.
The unrelated company had been underperforming prior to the investment and, by balance date, the NAV per share had reduced to 0.5. The trustees use NAV per share in calculating the market value of the investment. This results in a loss of 50% of the investments value since acquisition 4 months earlier.
The trustees advise that the investment was made due to the prospect of the company turning around.
Consideration is given to whether the investment meets the sole purpose test. However, it appears difficult to support a conclusion. Do you have any suggestions regarding the audit issue raised or how a supportable conclusion could be achieved?
Hi Peter
Thanks, my first question is does a member of the Fund becoming the CEO make the company a related party to the Fund and then the in-house asset rules apply from that date?
A related party of a SMSF is any company where a member or a Part 8 "associate" has control of the company. I would expect that a CEO could be argued to "control" (or have sufficient influence of) the company so that could make the company a related party to the Fund.
If the Fund's investment is less than 5% of its assets then the IHA rules will not have been breached if the company is deemed to be a related party.
In relation to the sole purpose test I would consider:
1) Is there any financial benefit to a member personally by the Fund having invested in the company.
2) What % of the Fund's investments have been invested in the company.
3) Does the Fund's investment strategy allow for such an investment.
4) What due diligence was done in relation to the investment & what paperwork was obtained to ensure that a market value was paid for the investment.
Thanks
SMSF AAA