Unlisted Investments
08 November 2023
The complexities of unlisted investments
A self- managed superannuation fund (SMSF) has many investment options, including unlisted investments. With the option to manage your own superannuation and invest in unlisted investments is one of the reasons many choose to open a SMSF; however, with this flexibility comes great responsibility.
When investing in unlisted investments, or shares, and unit trusts, it’s important to consider the requirement to value fund assets at market value as per Regulation 8.02B of the Superannuation Industry Regulations 1994SISR). SMSF auditors have always been required to verify the valuation of assets, but since the 2014 financial year, the Australian Tax Office (ATO) made regulation 8.02B a reportable regulation.
Documentation issues
Proving market value can be challenging for SMSF trustees and their advisers. With an unlisted asset, sufficient and appropriate evidence is needed to prove market value. Your SMSF auditor may require some of the following documentation:
Signed financial statements by the directors or trustee.
Ownership certificates.
Unit Trust deed.
Dividend or distribution statements.
A Property valuation (where property is the entity’s only asset).
A property title search to prove ownership.
Evidence to support the rent is at market rates and signed lease agreement if the lessee is a related party.
The recent sale of units or shares to an unrelated third party in the past 12 months.
Written verification of share or unit price from a director of the entity (must be from an unrelated party).
Typically, auditors are provided with unaudited financial statements with assets valued at cost, which is considered insufficient audit evidence under r8.02B. Since it is the responsibility of the SMSF trustee to have the assets valued, the auditor does not undertake the valuation themselves.
Related Party Unit trust
There are further restrictions on related party unit trust investments (Regulation 13.22A – 13.22D) A related party unit trust is when a SMSF and its related parties hold more than a 50% ownership of the trust.
A SMSF can only invest in a related party unit trust if the following rules are followed:
The unit trust has no borrowings or loans;
The unit trust does not have any investments in any other entity, hence for example the unit trust is not permitted to buy shares in listed companies;
The unit trust does not have a charge (e.g. a mortgage) over any of its assets;
The unit trust does not own any assets that were acquired from a related party after 11 August 1999, or were previously owned by a related party at any time since the time starting three years before the SMSF first acquired an interest in the unit trust (except business real property);
The unit trust cannot be running a business;
All transactions need to be on an arm’s length basis;
The unit trust has not entered into a lease agreement with a related party of the fund (unless it relates to business real property); or
The unit trust has made a loan other than a deposit with a bank or other financial institution.
If a SMSF invests in a related party unlisted unit trust, then further audit testing is required, meaning the auditor of the SMSF must audit the related party unit trust and further information will be required, such as
The unit trust bank statements for the full year, and
The unit trust deed to verify the start date of the unit trust and to ascertain if it is a pre-1999 unit trust.
Unlisted Joint Ventures
If a SMSF invests in an unlisted joint venture, the same principles apply. The auditor must be provided sufficient and appropriate evidence to verify any investment in the joint venture is recorded at market value. For example, if the major asset of the joint venture is property, then a property valuation must be provided.
In addition to documents to support the valuation of the joint venture the auditor should be provided with a signed joint venture agreement. This agreement must make it clear that neither party is liable for any defaults or wrongful acts of the other party. If the liabilities of the parties are not defined in this manner, the joint venture could be deemed a partnership resulting in the investment being an in-house asset.
If the joint venture is involved in property development with a related party, it is essential that the SMSF holds an interest in the real property being developed. The ATO states in SMSFR 2009/4 and SMSFRB 2020/1 that a joint venture involving related parties may be an in- house asset, and if a SMSF provides capital for the joint venture and has no other rights other than receiving a return on the final investment, this may be an in -house asset.
Investing in unlisted investments and shares can be complex. Our team of experts can help guide you through the ever-changing SMSF landscape. Before investing in unlisted investments, get in touch with the Unison SMSF Audit team.
The views and opinions expressed in this article are those of the author and do not necessarily reflect the thought or position of Unison SMSF.
This document contains general information and is not intended to constitute legal or taxation advice. If you need legal or taxation advice, we recommend you speak to a qualified adviser.
By Chris Campbell
Partner
