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The superfund advanced loan to the unrelated related trust to the extent of 45% of the fund's assets and also invested 20% in Units of the Trust.
The Unit Trust is carrying out the development activities.
The superfund is not receiving the interest regularly as per the loan agreement. The loan is unsecured. The unaudited financials of the superfund is showing negative equity. The trustees advanced an additional loan to the Unit Trust to the extent of 10% without any interest. The reason for additional loan is to meet the cashflow requirements of the Unit Trust as agreed by all Unit Holders based on their holdings.
What will be our audit approach here, do we need to qualify part A only for the recoverability of loans or Part A and Part B for the valuation. Additionally, can loan advanced to unrelated trust without interest will attract arm's length breach?
Hi Umesh
Section 65 raised as just a section to be considered.
Section 109 will depend on the exact circumstances. If the loan (with no interest) has been made on a commercial basis to protect the Fund's investment then yes arguably would not be a breach of this section. You would need documentation to support this.
Yes agreed should consider SIS Reg 8.02B that requires:
"When preparing accounts and statements required by subsection 35B(1) of SISA, an asset must be valued at its market value".
Thanks
SMSF AAA
Hi Umesh
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 / collectability of the units in the Trust & the loan to the Trust.
In relation to the compliance audit re the investment & loans to 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.
In relation to the loan being made without interest & the other loan with no interest being received you would need to review if this has been done on a non arm's-length / commercial basis. You would need to look at why no interest has been received and what the trustees have done to receive the unpaid interest. If non arm's length this would be a breach of section 109 & a qualified compliance audit report. If the breach meets the criteria of the ACR requirements it would need to be reported to the ATO (via the ACR).
I would also raise my concerns in the annual management letter to the trustees.
If other members have a view as to how they would approach the audit issues please let the forum know.
Thanks
SMSF AAA