Fund Investments, Valuations and Related-Party Transactions
Investment rules
Trustees must formulate and give effect to an investment strategy (s 52(2)(f)) considering diversification, liquidity, cash flow, and member circumstances. Investments must be made and maintained on an arm's-length basis (s 109). Related-party acquisitions are restricted, and in-house assets are capped at 5% of fund assets.
Valuation
Assets must be valued at market value for reporting and for testing limits. Unlisted assets - property, private companies, trusts - require a defensible valuation basis. The auditor tests the reasonableness of the valuation, not the commercial judgement, but must ensure the method is documented and consistent.
Related-party transactions
The auditor identifies related parties (members, their relatives, entities they control) and tests whether transactions are on arm's-length terms. Common issues: property leased to a member's business, loans to related parties, and acquisitions from related parties.
Traps in questions
- Assuming market value equals cost for unlisted assets.
- Missing that an in-house asset can arise through a related-party loan even if not labelled as such.
- Overlooking the arm's-length test where a transaction is with a member's spouse or a trust they control.
- Confusing the 5% in-house asset limit with the borrowing rules.
Rule of thumb
For any related-party transaction, ask three questions: Who is the related party? Is the term arm's-length? Does it create or increase an in-house asset? If any answer is unfavourable, consider a contravention report.