David Busoli, principal for SMSF Alliance, said the ATO’s stronger focus on auditing compliance “raises the temperature”, but it also reinforces an important message for trustees.
“Advisers and trustees often feel that the level of audit scrutiny is excessive and it’s true to say that it has become more ‘annoying’ over the last year,” Busoli said.
“There is a reason for this. The ATO has tightened its approach to SMSF compliance and has placed the burden substantially on SMSF auditors.”
Busoli said if the ATO believes an auditor is not performing satisfactorily it will report them to ASIC for remedial attention, which can include imposition of conditions, reputational loss and cancellation of registration.
“Auditors are required to take a more rigorous, evidence-driven approach. They must maintain workpapers that clearly show how material balances and transactions were tested and what evidence was obtained,” he said.
“The days of ‘trust me, I looked at the file’ are gone. If it isn’t documented, the ATO assumes it wasn’t done.”
He continued that a compliance audit is not a “quick skim” of the compliance checklist and that auditors are required to test compliance against key SIS Act and regulations.
These cover everything from financial statements, loans or financial assistance to members or relatives, borrowing and LRBA rules, arm’s length terms, disqualified trustees, and payment standards and preservation rules.
Furthermore, Busoli said the ATO has singled out several risk areas where it expects auditors to be particularly vigilant.
“One of these is illegal early access and prohibited loans. If this is not properly tested and, where relevant, reported via an ACR, the auditor can become part of the problem – and the target,” he said,
“Additionally, the Tax Office is looking at non-arm’s length income (NALI) and expenses, and even though the NALI rules are notoriously complex, it expects auditors to raise red flags where arrangements are obviously off-market.”
The ATO has already been active in regard to asset valuations, Busoli added, and has previously directly contacted auditors about funds reporting unchanged asset values for several years in a row without any ACRs being lodged.
“Auditors are expected to verify that year-end values for non-standard assets are current and based on reasonable evidence. It should be noted that this can be problematic when it requires a look through into the assets and activities of ‘private’ companies and trusts the SMSF has invested into,” he said.
“Finally, the ATO also highlighted the issue of disqualified trustees and trustee fitness and has said it will closely review auditors where its information indicates that a disqualified person has acted as trustee or director – and no ACR has been lodged.”
Although the focus is on auditors, Busoli said SMSF trustees should also be taking notice.
“Trustees need to be confident that their auditor is truly independent of the accountant/adviser and is ASIC-registered and in good standing,” he said.
“They should also make sure their auditor is not cutting corners with ultra-low, fixed audit fees for complex funds and has strong processes around documentation, valuations and contraventions. In short, a tough auditor is better than a lenient one followed by an ATO review.”
