Tax effect accounting and SMSFs

Tax Deffered

Trustees of self-managed superannuation funds (SMSFs) are required to prepare financial statements in accordance with the accounting policies as per the requirements of the SIS Act 1993 and SIS Regulations 1994.

There is no requirement for a superannuation fund to comply with international financial reporting standards as the financial statements of a SMSF are prepared under the special purpose framework. Consequently, superannuation funds often do not apply tax effect accounting principles in accordance with AASB 112, which is within the requirements of GS 009 ‘Auditing Self-Managed Superannuation Funds’ (reference para 218).

Tax effect accounting is fairly complex and ordinarily requires input from tax experts. However, tax effect accounting can be used as an effective tax strategy and there are some salient features that practitioners may want to consider as below:

  1. Provide an accurate measure of member benefits
    Reg 8.02B requires that all assets are valued at market value. As a result, often superannuation funds may report a significant appreciation in the value of their assets which in turn increases the balance in the members’ account. However, such an increase implies there is an unrealised capital gains tax liability. If the fund elects to apply tax effect accounting, effectively the statement of financial position reports a deferred tax liability which results in the fund reporting the appreciation in assets, net of the potential tax.
  1. Indicate potential tax liabilities
    Recognising deferred tax liability on statement of financial position indicates the Fund is potentially making profit over its investments. In such circumstances, there is some certainty that on realisation of the assets at a profit, the fund will incur a tax liability. Hence, recognition of a deferred tax liability would enable the trustees to make the correct investment decisions.

Where the Fund is in part pension mode, the quantum of deferred tax liability should be reduced on the basis the earnings from assets financing a pension are tax exempt. When the Fund recognises a deferred tax liability for a part pension fund, it ensures the pension withdrawals are not overstated.

Ordinarily, the auditor considers whether the recognition of any current or deferred tax liabilities or tax assets is appropriate given the likelihood of payment of liabilities or realisation of the assets based on the circumstances of the superannuation fund.

Where the calculation of deferred tax results in an asset, in absence of the ‘virtual certainty’ test being satisfied, there is a conceptual flaw in recognising a deferred tax asset due to the following reasons:

  • To recognise a deferred tax asset, means that the trustees have decided to dispose of the investments, post year end or at the future date, at the loss. Realistically, that is a very unlikely assumption considering the sole purpose of a Fund is to save up for retirement which would leave someone to conclude that the trustees intend to make a gain.
  •  AASB 1020, para 12 and 13, refers to the concept of ‘virtual certainty’ i.e. a deferred tax asset can be recognised as an asset where realisation of the benefit can be regarded as being beyond reasonable doubt. Based on my argument in the aforesaid paragraph, it is questionable if the accounting principles would justify recognising a deferred tax asset.
  • Conversely, there are no particular issues while recognising a deferred tax liability. Not because it is a liability but there is reasonable certainty, that on realisation of the assets at a profit, there will be a tax liability that the Fund will incur.
  • There are very limited circumstances when a superannuation fund can recognise deferred tax assets. One of these circumstances would be when, events subsequent to balance date satisfies with certainty that the trustees have disposed of the Funds’ investments at the loss or there is a permanent diminution in the value of securities. For instance, if the fund reports a permanent diminution in value of certain assets, it would satisfy the ‘virtual certainty’ test.

In summary, accounting for deferred tax depends on the circumstances within each superannuation fund and must be planned, administered and accounted for correctly.


Reliance Auditing Services is a specialist independent auditing services firm providing quality audits to SMSFs, companies, not-for-profits and AFS licensees all over Australia. Reliance Auditing places a huge emphasis on educating our clients to ensure they fulfil their reporting obligations.

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DISCLAIMER: This information is an interpretation of rules, regulations and standards. It should not be considered as general or specific advice and neither purports, nor is intended to be advice on any particular matter. No responsibility can be accepted for those who act on the contents of this publication without first obtaining specific advice. Liability limited by a scheme approved under Professional Standards Legislation.