With gold prices currently hitting record highs, it would come as no surprise that many SMSF investors are taking a renewed interest in this precious metal as a safe haven for wealth preservation. For SMSFs, holding physical gold can be an attractive option, but it also comes with specific compliance obligations. As an SMSF auditor, I recently encountered a case that highlighted the need for reliable purchase documentation—particularly when it comes to alternative investments like gold.
The Scenario
The SMSF being audited included a material investment in gold. During the audit process, I requested the purchase documentation for these gold investments, expecting to see clear and reliable records from a reliable source. However, what I received was far from satisfactory.
The documentation provided went back a few years (it wasn’t purchased in the year of audit). and was just a payment record from a bank account. When I queried further the client informed me that they had purchased the gold via eBay, for which they provided only the eBay listing descriptions, which added another layer of uncertainty to the validity of the investment.
The Dilemma
Given the informal nature of the purchase and the questionable documentation, I found myself in a precarious position as I couldn’t verify the authenticity of the gold. As the auditor, it was my responsibility to ensure that all assets held within the fund were legitimate and accurately valued.
To address this issue, I requested that the client engage a professional valuer to conduct an assessment of the gold holdings. However, the client was hesitant, and they expressed a strong reluctance to incur the costs associated with the valuation, believing that the existing documentation would suffice.
The Turning Point
I explained the potential consequences of not obtaining a valuation (in this case, qualify the audit). Wanting to avoid this, the client proceeded with the valuation. To their shock, the valuer confirmed the gold they had purchased was fake and, therefore, worthless.
The Lesson Learned
This case serves as a good reminder of the critical role that accurate and verifiable documentation plays in SMSF audits. Here are a few key takeaways:
- Always Document Transactions: Proper documentation is essential for all investment purchases, especially when dealing with alternative assets like gold. Ensure that the records are clear, detailed, and reliable.
- Be Wary of Informal Purchases: Transactions conducted through informal channels, such as eBay or private sales, require additional scrutiny.
- Communication is Key: As an auditor, it’s important to communicate openly and honestly with clients about the risks and implications of inadequate documentation. Ensuring they understand the potential issues can lead to better compliance and peace of mind.
If you’re managing an SMSF or considering investments in alternative assets, remember thorough documentation and professional advice are your best defense against future complications.
