Auditor independence changes driving uptick in contraventions

Mr Micale noted that around 97 per cent of the lodging SMSF population have no reportable contraventions from their audit.

“Whilst this is encouraging, in the 2022 financial year, we’ve received ACRs for 13,558 funds with 39,997 contraventions being reported,” Mr Micale told delegates at the CA ANZ National SMSF and Financial Advice Conference.

“This is an increase of nearly 3.5 per cent in the number of SMSFs with ACRs lodged and an increase of nearly 6.3 per cent in the number of contraventions reported compared to the 2021 financial year.”

While the reason for this growth is not entirely clear, Mr Micale said it’s likely that the changes to SMSF auditor independence have led to enhanced reporting.

Following the changes to auditor independence for SMSF auditors, 31 per cent of funds have engaged the services of a new auditor, according to the ATO.

“This is above the 20 per cent churn we usually see from year to year and appears to have had a positive impact on the audit process as there has been an increase in the level of reporting,” said Mr Micale.

“I view this as a positive shift for the sector as the majority of these contraventions are not serious and can easily be rectified before potentially creating bigger issues down the track.”

The most common contravention reported for the 2021–22 income year was members accessing their retirement savings early, which he said is often reported as a loan to a member or a payment standards breach.

“Accessing the assets of the SMSF for any use where a condition of release hasn’t been met, even if it’s to support a member’s business, constitutes early access,” he said.

The main drives of regulatory contraventions continue to be financial stress, poor record keeping and a lack of understanding of the rules, he stated.

Mr Micale noted that the ATO disqualified 252 trustees for serious breaches of the law in the 2021–22 income year, while other contraventions attracted administrative penalties of $3.4 million.

Some of the cases the ATO has dealt with involve the under-valuation of assets acquired from related parties, and income from property developments, private company dividends, unit trust distributions and personal services income being inappropriately diverted into the SMSF, he stated.

“How we respond to breaches depends on a number of factors such as the impact of the breach on the fund, the compliance history of the trustee, and their attitude to meeting future regulatory obligations,” he said.

“As you would expect, we treat a simple mistake very differently from someone who shows a blatant disregard of the law.”