Speaking to SMSF Adviser, Hayes Knight director Ray Itaoui said while there hasn’t been any drastic changes with super in the past couple of years, there are a couple of different areas that auditors will be paying close attention to this financial year.
Given the the recent rise in inflation and interest rates, Mr Itaoui said there could be some potential issues with related party loans.
While there has been a downward trend in property prices recently, rents are continuing to go up and inflation is filtering through to rental markets, he said.
“With commercial properties, inflation might trickle through to the cost of maintaining that arrangement or the buildings or commercial premises and that’s where auditors will want to ensure that the super fund is not being disadvantaged,” he explained.
“The business may be under financial pressure or there may be some compression on margins. It’s important that the super fund is not disadvantaged by the arrangement because otherwise there may be some SIS issues.”
Mr Itaoui said any additional costs that pop up need to be consistent with the lease agreement.
“You can’t have the super fund just covering all the costs of the business if it’s not part of the lease agreement. So if you have a commercial property with a commercial kitchen fit out, for example, then you can’t just have the super fund paying for a new fit out if it’s not part of the lease agreement. It all needs to be arm’s length,” he said.
Early release issues will be another significant focus area for auditors this financial year, he said.
“You’re starting to see some inflationary pressure on prices and petrol and some businesses may be struggling a bit,” he said.
Mr Itaoui said there is some concern that individuals and businesses facing financial pressure may raid their SMSF bank account.
“During the GFC, there was a few funds that accessed their SMSF bank account to bail themselves out of trouble, so that’s a risk area that auditors [will be looking at],” he warned.
One other area where there may be potential issues over the next couple of years, said Mr Itaoui, is with funds that have geared to buy property in the last 12–18 months.
Mr Itaoui said its important that to keep an eye on the value of these properties in case the value of the loan ends up exceeding the actual value of the property.
“I don’t think it will be an issue this year but if property prices continue to go down it could become a problem later on,” he warned.
He noted that a lot of LRBAs have loan to value ratios of around 60 per cent which means a good margin has been left for any decline in property prices.
While the recent work test changes won’t be relevant for audits for the 2021–22 financial year, Mr Itaoui said it’s important that SMSF trustees are aware the details of the changes as there is currently some confusion among trustees.
From Friday last week, the work test was removed for individuals making non-concessional contributions between the ages 67 and 75.
“I’ve been speaking to a few trustees, and people don’t quite realise that they still need to meet the work test if they’re claiming a deductible contribution. It’s well known for everyone in the profession but clients read a headline and think the work test is scrapped,” he said.
SMSF auditors will be checking for a notice of intent to claim form where the member is looking to claim a deduction, he said.
