Auditor Findings on Market Valuation and Collectables
An SMSF holds a residential property, a vintage car worth about $180,000, and a painting valued at $90,000. The fund's 2024-25 financial statements value the residential property at its 2019 purchase price of $750,000. The auditor notes that the property has not been revalued since purchase, that the car is used occasionally by a member for personal driving, and that the painting is hung in the member's home. The fund has two members, both retired, and the trustee is the member who uses the car. The auditor has issued a qualified audit report and the fund is due to lodge its annual return. The trustee asks whether the assets can stay as they are and what the consequences of the qualified report are.
1. Identify the compliance issues with the three assets and the valuation approach.
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The residential property must be valued at market value each year, and a 2019 purchase price is not acceptable evidence of current value. The trustee should obtain a valuation from a qualified valuer, and the financial statements should reflect it. The car is a collectable, and the fund must comply with the collectable and artwork rules; a member's personal use of a fund asset is a breach of the sole purpose test and may also be a loan to a member. The painting is artwork, and the rules require it to be stored and insured appropriately and not displayed in a private residence; hanging it in the member's home breaches those rules. The trustee must rectify by ceasing personal use, moving the artwork to compliant storage, and obtaining proper valuations. The fund may also need to consider whether the car and painting are permitted investments under the deed.
2. What are the consequences of the qualified audit report and what should the trustee do before lodging?
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A qualified report does not automatically make the fund non-complying, but it may prompt ATO review and can affect the fund's ability to claim exempt current pension income if the report is not unqualified. The trustee should obtain the auditor's exact reasons, rectify the breaches where possible, and document the remediation. The ATO may require an auditor contravention report if there is a contravention. The trustee should consider voluntary disclosure, which may reduce penalties, and should ensure the annual return is lodged on time. The fund should also address the valuation and collectable issues before the next audit cycle. If the breaches are serious, the trustee may need to consider whether the fund should continue or whether assets should be transferred out. Legal advice should be obtained on the personal use and artwork issues, as these can attract significant penalties.