Preparing your SMSF’s 2020 financials and tax return

Over the last 15 years, I’ve enjoyed working with SMSF trustees, preparing SMSF financials, tax returns, audits, and providing strategic advice. I’ve worked for many employers, from Big 4 to niche accounting firms to administrators, and estimate seeing over 4,000 SMSF’s over my career so far.

And the question I hear at least once a year is “what information do I need to provide to prepare the SMSF financials and tax return?”. In a time where accounting staff are working from home, providing the right documentation, preferably electronically, will be vital to ensuring SMSF trustees meet their reporting and lodgement obligations.

So let’s run through documentation as it pertains to assets and liabilities of an SMSF.

Bank accounts

Documentation that’s directly from the financial institution is important for an accountant and auditor to receive. 

It's primary substantiation evidence that the SMSF has ownership of the account, it states the SMSF trustee name and/or SMSF name on the bank account, and is presented on the letterhead of the financial institution where the account is held. Bank statements are the perfect documentation for accountants and auditors.

Alternatively, your accountant may be utilising data feeds directly from the SMSF bank, in which case it’s only the year-end balance that may be needed as substantiation.

Different accountants and different auditors have differing substantiation requirements, so it's always best to provide more information than less.

Note that preparing your own spreadsheet of the transactions and sending that to the accountant isn’t sufficient. Such a spreadsheet purely serves as a guide to the accountant for transactions that don’t have a sufficient description listed on the bank statement (e.g. only 'deposit' or 'withdrawal' displayed on the bank statement).

The spreadsheet can’t be used as the sole substantiation as it’s not a document directly from the source (i.e. the financial institution).

If you have security concerns regarding the bank account number of the bank statements being forwarded electronically, you can simply remove the details by crossing out the banking details and scanning that through or using a software program to remove that text from the document.

Note that banking details are compulsory for the valid electronic lodgement of all SMSF annual tax returns.

Investments – listed shares, listed unit trusts and ETF’s.

There are two aspects to these investments when collecting information for your accountant, the transactions made during the year and the June 30 position. Let’s look at the year-end position.

A portfolio valuation at June 30 from the broker is great when all investments run through that broker and their systems are updated for share purchase plans, buybacks etc. specific to your holdings.

Some providers only keep records of the trades placed through them. This restriction has inherent risks and may create extra accounting costs to the SMSF, so it’s important to understand what investments are being recorded by your broker and what’s not.

Other similar risks can come from any shareholdings that are issuer sponsored or have an alternative Chess sponsorship.

If your SMSF finds itself in this position, you can log in online to the relevant share registry and print out the June 30 holding balance for the accountant and auditor.

As for transactions, thousands of corporate actions occur every year and providing the paperwork for those that your SMSF has been involved in is important.

From share purchase plans, buybacks, rights issues etc, holding proof of these events is not only for the purposes of correctly recording the year-end market value and shareholding at June 30, but also for the future when that investment is eventually sold.

Unlisted investments

There are many types of unlisted investments, but what they all have in common is the need to be valued at June 30 and proof of ownership by the SMSF, which is difficult due to their unlisted nature.

To prove ownership, a share certificate can confirm how many shares/units were held. Other means to prove ownership at June 30 is an email from the company secretary/director, or ASIC records showing current and historical shareholdings.

For valuation purposes, a set of June 30 financials will be produced for the unlisted investment and will be needed by both the accountant and auditor.

Depending on the investment, further information may be needed to confirm its value such as an understanding of the underlying investments and their market value.

If you hold unlisted investments you should ask your accountant what information you can source this year to assist them.

Property

Whether commercial property or residential property, valuations from a licenced real estate agent is the most common substantiation sought.

The valuation should state the name of the agent, and the agency that the valuation is being prepared by.

This valuation is usually a complimentary service when the property in question is also being leased by the same real estate office. Some SMSF’s obtain this valuation annually, others every three years.

To prove ownership, auditors will always want to sight the latest title search from the relevant state revenue office, which most SMSF trustees don’t have access to. As such, the accountant or auditor will disburse the cost of the title search to the SMSF.

Any lease arrangements entered into or amended during the financial year should be provided also.

Limited recourse borrowing arrangements

The main item here is to ensure the accountant and auditor have at hand the bank statements and the loan agreement entered into. Reasons for this were discussed previously for bank accounts.

Other – unpaid debtors, unpaid creditors

If your SMSF had sundry debtors or sundry creditors listing in the previous year’s financial statement, it’s worthwhile visiting these amounts. 

Quite often these amounts are due to income not paid into the SMSF, or expenses not paid out of the SMSF, that have been recorded as respective sundries within the financials.

If you are uncertain as to what these amounts pertain to, you should contact your accountant and ensure that the money stated is paid into the SMSF or paid by the SMSF as soon as possible if it hasn’t already been cleared out.

There are a handful of other assets and liabilities that could be included within this article, but I hope I’ve given you an understanding of what substantiation is needed by your compliance team to undertake the annual SMSF financials, tax and audit duties.