“In relation to non-arm's length income and expenses, I believe materiality will play a major part. Where there is a material misstatement in the financial accounts, that may then lead to a Part A qualification on the ATO SMSF-approved form. That then goes through to the annual return that is submitted by the SMSF.”

If the auditor decides to qualify under the auditor contravention report, several factors need to be taken into account.

“As far as guidance or useful information from an audit perspective, [ask whether] you are following the list of documents. There is the ATO literature, the auditor checklist as well as the contravention report and the instructions to complete that,” he said.

“Most of the time, those documents don't specifically refer to non-arm’s length income, but it is like any other issue that you deal with in relation to the fund – the overstatement of income, the overstatement of expenses, and other financial reporting issues that you have to deal with.”

Negline said there is also AUASB’s GS009, last updated in June 2020, which should be reviewed, especially in relation to paragraphs 263 and 356 as well as various appendices.

“There has been a law change with effect from July 2024 but those changes are not reflected in AUASB GS009, so that needs to be factored in.”

“In reference to the illustrative letters contained in the appendices mentioned, they may not have reference to NALI either, so it would be advisable to change the wording in those to minimise any risks,” he said.

“NALI is sometimes very difficult to identify, so, for example, in updating the engagement letter, the trustee may be saying that in relation to non-arm’s length income issues they have informed the auditor of any issues, and the auditor would subsequently indicate they didn’t find any issues based on the information they were given.”

Negline said another consideration in relation to guidance for auditors from a NALI perspective is the existing body of ATO literature, the first of which is the law companion ruling, which is currently being updated.

“The superannuation contribution ruling is also being updated and these two documents do need to be finalised, which will hopefully be done by the end of October 2025.”

“There was a joint association document letter submission sent to the ATO in relation to the draft changes for both of those documents and I would encourage auditors to download a copy because it will give them an idea of the concerns about some of the things the ATO have said in those particular ruling documents.”