ATO further clarifies evidence requirements with APESB guidance

“Where the auditor or their firm acts as a tax agent for the auditing client and merely prepares an SMSF annual return which the client takes on responsibility for, then this situation should not create an independence threat,” Ms Grant explained in a recent SMSF Adviser podcast.

“However, where the tax agent might provide other services to the audit client involving tax advice or calculations that go beyond what is needed for preparation of the annual return and go more towards what is needed for the financial statements such as calculating current and deferred tax liabilities, then self-review threats can arise.”

Ms Grant stated that where the ATO reviews an auditor who works for a firm performing both accounting or administrative services for a SMSF clients as well as audit services, the ATO will be checking to see if the auditor’s firm also took on management responsibilities for the audit client.

“This is because the restructured code requires that a firm or network firm must not assume management responsibilities for an audit client,” she said.

“So, we will be asking the accountant for the SMSF trustee whether management-type decisions were made on behalf of the trustees that could have created self-review threats. These include whether any advice was provided to the trustees about the management of their fund in order to comply with the SIS or income tax legislation.”

For example, Ms Grant said the accountant might have provided advice about how the trustee could maximise concessional and non-concessional contribution limits or when the best time is to commence a pension.

They might also develop structures and strategies to enable trustees to make investments in unrelated or related parties without breaching the in-house asset rules, the sole purpose test or non-arm’s length income rules, she added.

“If the accountant denies taking on these management responsibilities, we will then be asking for evidence that the trustee possessed the suitable skills, knowledge and experience to be responsible at all times for their decisions and that they oversaw any services provided by the accountant,” she stated.

“This will include evidence that the trustees took responsibility for the preparation of the financial statements if this service was carried out by the accountant.”

After 1 July 2021, Ms Grant said that as part of the ATO’s compliance review on auditors, where an auditor has conducted an audit on a client that their firm has taken on management responsibilities for including preparing the financial statements, the Tax Office will expect to see evidence on the audit file demonstrating that the trustee made all decisions in relation to the management of their fund.

“This goes beyond the trustee just signing the trustee declaration in the financial statements or saying in a trustee representation letter that they have prepared the financial statements,” she noted.

“This means seeing evidence of the trustee having coded all the fund transactions or approved entries to the trial balance. It also means us seeing evidence that the trustee selected relevant accounting policies, has allocated income to the member’s accounts, evidence the trustee has valued the assets and prepared any tax calculations and evidence the trustee is managing the fund’s compliance with the SIS legislation.”

This way, the ATO, she said, can be sure that the firm has not taken on management responsibilities for the trustee and that the trustee has taken full responsibility for those decisions.

“It’s also to test that the preparation of the financial statements was routine or mechanical such that the accountant has exercised little or no judgement in preparing the financial statements,” she said.

In order for the trustee to take on full responsibility for those decisions, they will need to possess the suitable skills, knowledge and experience to do so, which means the ATO will be wary of trustees who may not have the type of occupation that suggests this is the case, such as a trustee who is a practising accountant or tax agent.

“So where we have our doubts about whether the trustee has genuinely taken on these responsibilities, we may contact them to verify and test their knowledge on the documentation they prepared,” she cautioned.

“Then if we cannot be satisfied that there is sufficient appropriate audit evidence on the auditor’s file to demonstrate the auditor complied with the independence standards when conducting an in-house audit, we may refer them to ASIC for further action.”