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I am currently auditing a Self-Managed Superannuation Fund (SMSF) that has invested in a proprietary limited company (Pty Ltd). The SMSF holds a 34% stake in this company. Notably, one of the members of the SMSF also serves as one of the four directors of Pty Ltd.
In the Directors Report of Pty Ltd for the fiscal year, it is mentioned that the company issued shares to its employees and senior executives. Interestingly, the SMSF has recorded the acquisition of these shares. Given that the SMSF has acquired shares that were issued to employees and senior executives of the company, and considering that a member of the SMSF is also a director of Pty Ltd, a question arises: does this situation breach the sole purpose test?
It is noteworthy that the member, who is a director of Pty Ltd, has signed a declaration confirming that Pty Ltd is not a related party of the SMSF. Nevertheless, in light of these circumstances, are there any other specific audit points that should be taken into consideration?
Hi Umesh
Thanks, there are a number of issues that need to be considered.
As a starting point you will need to consider if there has been a breach of section 66 of SIS. The Super Fund cannot acquires the shares from a related party so you would need to check that the shares were not issued to the member and he / she then sold or contributed them to the SMSF.
You will also need to consider section 109 of SIS and make sure that a market price was paid for the shares. I was involved recently with an ATO review of an unlisted share purchase and the ATO queried how the share price was determined and whether the shares were available to a range of investors that allowed a market price to be determined. If market price has not been paid for the shares the investment may be considered to be non arm's length expenditure and any income or capital gains from the investment may be taxed at 45%.
Re section 62 the sole pupose test of SIS yes you would need to get an explanation of how the trustees believe this will support the member's retirement. You would also need to consider whether it complies with the Fund's investment strategy under SIS Regulation 4.09.
As auditor you also need to review if the investment is a breach of the in-house asset rules under SIS sections 82 - 85. You need to review compliance with this and not just rely on a declaration from the member that the investment is not an IHA.
Another section / regulation to consider is Regulation 8.02B that requires assets to be valued at market value. There may be a breach of this section if you cannot get audit evidence to support the market value at year end. You may also have to issue a Part A financial qualification if you cannot verify the value of the investment at year end.
Thanks
The Auditors Institute