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Self Managed Super Fund (SMSF) Article
SMSF Audits

By Tony Negline.

This article may be out of date.

13th April 2005

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There are now more than 300,000 SMSFs and they are all different from each other.  At the same time the laws which govern superannuation are very intricate.  From a regulatory perspective, it is extremely difficult to develop systems or processes that can be used to check compliance uniformly across this sector.

Regulation therefore is done by identifying trends, factors or activities which might indicate bad behaviour and developing processes to counteract them.  Although this system sounds far from robust it is surprisingly successful.

The chances of bad behaviour slipping under the radar is meant to be further reduced because each year a small fund has to be audited.  The audit confirms the financial bone fides of a fund and also checks to make sure all super laws have been complied with.

Over the last few months there have been some important changes to how SMSFs are regulated and anyone involved in these funds needs to know about them:

1. Last year the ATO let the auditing profession know that it was not particularly happy about the quality of work being done by many SMSF auditors and warned of the consequences of continuing to do a poor job.  This is especially important for SMSF trustees because legislative compliance breaches found after poor audit work might lead to the imposition of penalties.

One concern for the ATO is its belief that the job of an SMSF auditor might be compromised if there is a close connection between the auditor, administrator and accountant.  The ATO believes that it is unlikely to get a robust audit if the auditor and administrator are from the same small accounting practice.  Last year it demanded that auditors take their independence seriously.

The various accounting bodies were extremely concerned about this view because they believe that they regulate this area of activity.

Institute of Chartered Accountants CEO, Stephen Harrison told his members, “Our professional standard has clear guidelines on how to identify, assess and manage risks to professional independence.  Where safeguards cannot be implemented, the member is obliged to reject or cease the engagement.”

In a big win for the accounting bodies the ATO has recently had to agree with this view however the ATO has also said that the chances of it reviewing a fund will be higher if a SMSF’s tax agent and auditor are the same company.

2.  If a SMSF auditor finds that a fund has breached any legislative requirement then the auditor must tell the ATO of the breach if it might affect the members’ account balances and other fund benefits.  This reporting, which came into effect on 1 July 2004, effectively requires the auditor to use their professional judgement to decide how important a particular legislative breach is before reporting it to the ATO.

However until recently the ATO told SMSF auditors that it wanted to know about every breach no matter how trivial.  The ATO has admitted that it does not have the power to demand to know about every contravention and has told SMSF auditors to use their knowledge and experience before reporting.

So what happens when a SMSF auditor reports a breach to the ATO?  The ATO writes to trustees acknowledging receipt of the notification and tells the trustees to rectify the contravention if they haven’t done so already.  The ATO then assesses the breach and if follow-up action is required the trustee is notified.

Ideally the ATO should do more at this point.  The super legislation gives the ATO enormous power to fine or penalise anyone involved in a contravention of the super laws and trustees need to know if the ATO intends to let the matter drop or pursue the matter further.  The ATO has recently announced that it will not take any action on auditor reports it receives this financial year.  This is good news because the current open-ended approach is not fair.  We are yet to hear how the ATO will approach breaches reported next financial year.

3. One area that SMSF trustees need to be very careful about getting right is in the area of record keeping.  Brett Davies a Perth based lawyer noted that he is aware of some instances where trustees who have not kept adequate records have been threatened with penalties of various types.

So what records are required?  At a basic level minutes of trustee meetings and decisions (where matters affecting the fund were discussed), records of all changes of trustees, members’ written consent to be appointed as trustees, copies of all reports given to members, annual appointment of auditor, administrator, actuary and investment manager.

4. Lastly, the ATO has warned SMSF trustees to ensure that assets of the fund are held in the name of the trustee.  The ATO says that it has found quite a number of instances where fund assets are in a members name or a member’s business.  If a state or territory does not allow assets to be held in a super fund’s name then an appropriate declaration of trust should be in place.

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This email is general in nature only and does not constitute or convey specific or professional advice. Legislation changes may occur quickly. Formal advice should be sought before acting in any of the areas discussed. Be aware that the information in these articles may become innaccurate with time. Responsibility is disclaimed for any inaccuracies, errors or omissions. Particular investments are neither invited nor recommended and hence this publication is not "financial product advice" as defined in Section 766B of the above legislation. All expressions of opinion by contributors are published on the basis that they are not to be regarded as expressing the official opinion of any other person or entity unless expressly stated. No responsibility for the accuracy of the opinions or information contained in the contributor's articles is accepted by any other person or entity. Copyright: This publication is copyright. If you wish to reproduce this article you require a license, which can be purchased here, to do so.

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