The unlisted investments in a Self-Managed Superannuation Fund (SMSF) require careful compliance with superannuation and tax laws. But auditing these investments doesn’t have to feel like pulling teeth. It can be surprisingly satisfying with a bit of structure (and maybe a good cup of coffee). Let’s break it down with some easy-to-digest steps and tips so you can tackle audits like a pro.
Key Steps to Nail Your Audit
1. Identifying Related vs. Unrelated Unlisted Investments
When auditing unlisted investments in an SMSF, it’s crucial to determine whether the investments are related or unrelated. This impacts compliance with related-party rules and the in-house asset limit (5%).
Here’s a quick guide:
| Criteria | Related Investment | Unrelated Investment |
|---|---|---|
| Control/Significant influence | The investment is in a company or trust controlled by SMSF members or relatives. | No control or significant influence by members or their relatives. |
| Relatives and Associates | Entities owned or controlled by relatives of SMSF members (such as spouses, children, or business partners) are also considered related. | The unlisted investment is not owned, controlled, or influenced by the SMSF members, relatives, or associates. |
| Ownership structure | SMSF members and/or their associates collectively own more than 50% of the shares or units of the unlisted investment. | The SMSF holds a small, non-controlling interest in the company or trust (50% or less). |
| Management Roles | SMSF members or associates hold key management roles (e.g., directors or trustees). Still, the role is subject to more than 50% control. | The company’s or trust’s management or directorship is independent of the SMSF members and their associates. The SMSF members have no say in day-to-day operations or strategic decisions. |
Why It Matters
- Related Investments: Require scrutiny to ensure they don’t exceed the in-house asset limit and comply with arm’s-length transaction rules.
- Unrelated Investments: These are generally less complex but must still align with the SMSF’s investment strategy and fair valuation principles.
2. Verify financial audit assertions
Financial audit assertions are critical for ensuring the accuracy and reliability of SMSF financial statements, especially when dealing with unlisted investments. Auditors must evaluate these assertions to verify the fund’s compliance with superannuation and tax laws.
| Assertion | Definition | Importance for Unlisted Investments | Supporting Documents |
|---|---|---|---|
| Existence | The investment exists as stated in the SMSF’s financial records. | Confirm the SMSF owns the unlisted investment. | Title deeds, unit (share) certificates, ASIC statements |
| Completeness | All unlisted investments owned by the SMSF are recorded. | Prevents understatement/overstatement of investment, ensuring full disclosure. | Year-end certificates or registry statements. |
| Ownership/Rights | The SMSF holds legal and beneficial ownership of the investment. | Prevents disputes over asset ownership. | Shareholder registry, trust deeds, legal agreements. |
| Valuation/Accuracy | The investment is recorded at fair market value. | Ensures accurate reporting and compliance with ATO guidelines. |
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| Presentation/Disclosure | The investment is properly disclosed in financial statements. | Ensures transparency for stakeholders and regulators. | Review notes to financial statements for compliance. |
Why These Assertions Matter
- ATO Compliance: Proper verification ensures compliance with SMSF rules and avoids penalties.
- Accurate Reporting: Assertions ensure the fund’s financial health is transparently presented.
- Fraud Prevention: Verifying existence and ownership helps detect and prevent fraud or errors.
3. SMSF Compliance Audit
Unlisted assets often come with unique challenges like valuation, ownership verification, and related-party rules. A thorough compliance audit safeguards the fund’s integrity and protects members’ retirement savings.
Below is the key area of focus:
| Area of Focus | Regulation | Audit Procedure | Exception |
|---|---|---|---|
| In-House Asset Rules | SMSFs are limited to holding a maximum of 5% of their total assets. In-house assets include investments in related parties or trusts. |
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| Arm’s Length Transactions | SMSF transactions with related parties must be conducted at arm’s length, meaning the terms (e.g. price, conditions) should reflect those of a transaction with an unrelated party. |
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| Valuation | SMSFs must report the market value of investments at year-end. | See point 2 and ensure valuations are based on reliable and objective data and conducted regularly per ATO guidelines. |
Satisfying 13.22C Requirements
| Requirements | Purpose |
|---|---|
| No Borrowings | This reduces financial risk for the SMSF, ensuring the trust remains secure for retirement savings. |
| No Charge over Assets | This ensures that the trust’s assets are not used as collateral and are free from claims by external creditors, thus protecting the SMSF’s investment and minimising risk. |
| No Investments in Other Entities | This ensures that the trust holds direct assets and avoids unnecessary layers of complexity and risk. |
| No Loans to Related Parties | This ensures that the trust’s assets are used solely for investment purposes and not for the benefit of individuals connected to SMSF. It ensures that investments are for the ultimate benefit of the SMSF members and remain focused on retirement savings. |
| No Leasing to Related Parties (Except for business real property) | This ensures that the SMSF trustees do not engage in transactions that benefit related parties to the detriment of the fund. This keeps the fund’s investments transparent and at arm’s length. |
A robust compliance audit ensures SMSF investments align with regulatory requirements and builds trust in the fund’s governance, ultimately securing members’ retirement benefits.
Conclusion
Auditing unlisted investments in SMSFs is critical in ensuring accurate financial reporting, maintaining compliance, and safeguarding members’ retirement savings. By focusing on key areas such as ownership verification, fair market valuation, related-party rules, and compliance with sole purpose tests, the trustees and auditors can effectively navigate the complexities of unlisted investments. A thorough audit process mitigates risks and regulatory breaches and reinforces the SMSF’s integrity, helping it achieve its goal of securing financial security for its members.
National Audits Group: Your Trusted Audit and Assurance Specialist
At National Audits Group, our team of expert SMSF auditors works with thousands of funds, ensuring they remain compliant with the constantly evolving regulations. We proudly partner with accounting firms to provide their clients with peace of mind, delivering audits with a pragmatic and approachable style that makes the process seamless and stress-free.
Jennifer Ignacio, Auditor, National Audits Group
Further Reading:
Key SMSF Updates for the 2025 Financial Year
Understanding Limited Recourse Borrowing Arrangements (LRBAs) for SMSFs
