Liability risk for tax agents posed in new audit cycle
The proposal to extend the SMSF audit cycle to three years, if enacted, will place a greater onus on SMSF professionals who prepare tax returns to identify issues with transactions, according to a financial services company.
Merit Wealth accountants services director David Moss said that while extending the annual audit to three years is unlikely to have much impact on accountants who put together the accounts for an SMSF, for those who also prepare the tax return, there could be some added liability should this proposal go ahead.
The step-by-step process currently, Mr Moss said, is that the accounts are done, the tax return is drafted based upon that, the audit is done, and once the audit is completed, the tax return is lodged.
When tax agents prepare a tax return under the current laws, they prepare it knowing that someone else is going to audit that as well, so if there are any potential errors in the tax return, the auditor will hopefully pick that up and any issues can be addressed.
“So, there is some liability there with preparation of the tax return itself. [Tax agents] use their best judgement to make sure that the information is correct, and if they think the information is incorrect, they need to raise that and deal with that with the trustee,” Mr Moss said.
“An audit has to have occurred, [however], and once the results of the audit come out, that tax agent can look at the audit and say based upon this audit, ‘This auditor says they don’t think there is anything wrong here’, or the auditor [might identify] a transaction between related parties that could be a problem, and if there is a problem, that might mean there are different tax implications.
“For example, if you’ve got someone who has a property within an SMSF, and it was leased to someone who is not connected to them, that’s business as usual, rent comes in, nothing should really show up. If that property was leased to a related party, to a family member, and let’s say the rent that was paid on that property was a lot less than it should have been, the accountant, the person preparing the tax return, might not know that, but the auditor will probably identify that. The auditor will say this is a problem, this is a breach, and the auditor would also say based upon that, that income and the way that asset is treated within the tax return should be different. Penalty tax rates may apply and it may be treated as non-arm’s length income.”
At the moment, there is basically a backstop, Mr Moss said, as the auditor provides clearance before the tax return is lodged.
If you remove that audit, the variant now is that accounts are done, the tax return is drafted and lodged, and there could be issues in there that the tax agent hasn’t picked up.
Mr Moss said: “If you’ve got no audit there and there is that same transaction where it’s not arm’s length and maybe it should have been in the tax return slightly differently, and that means that the super fund should have paid tax of $10,000 instead of zero, that then increases the risk for the accountant.
“The accountant could potentially be lodging incorrect documents without knowing about it. The backstop is not there, which means the risk has gone up.”