The new ATO penalty power regime has changed how the ATO processes ACRs. This is now based on risk assessment and means that those funds classified as high-risk SMSFs will result in an ATO audit with administrative penalties being applied.
The SMSF auditor, however, is required to lodge an ACR in those circumstances where contraventions meet specific ATO reporting criteria.
There are seven tests that SMSF auditors have to work through to determine whether a contravention requires reporting.
Test 5 was introduced when S35C(2) became reportable in 2009 and Test 2 for new fund breaches was tweaked in 2011 to include a $2,000 threshold after the ATO was inundated with ACRs. Apart from these changes, the basic tests have remained the same.
Given that SMSF auditors provide a critical element of the administration and regulation of SMSFs, it would make sense that SMSF auditors assist the ATO with risk assessing funds prior to lodging an ACR.
This may result in a new set of tests that are more relevant in today’s SMSF landscape.
By way of example, a $2 million fund that has $32,000 worth of shares in the trustee company name only would be reportable under Test 7.
Even though the breach represents 1.6 per cent of assets and is not material, it is still reportable since the total value of all contraventions is greater than $30,000.
Of course, security of fund assets is extremely important and the fund should be listed as the beneficial owner. But many first time breaches that are effectively administration issues could be resolved without notifying the ATO, thereby saving valuable time and resources for all parties.
The breach could be risk assessed by the SMSF auditor and qualified without lodging an ACR. If it was not rectified for next year’s audit, it would be reportable under Test 4 and provide more insight into trustee behaviour.
Alternatively, should a $2 million fund in which the trustees have illegally accessed $32,000 be reported the first time? Without a doubt.
With average SMSF assets per fund of $992,107, is the starting point of $30,000 in Test 7 relevant for all breaches? How would adopting a risk assessment approach impact the other six tests?
While SMSF auditors act as a valuable gatekeeper for SMSF compliance, there is more that could be done by SMSF auditors that would benefit the ATO, SMSF auditors and trustees alike.
A review of the reporting criteria that set out what contraventions are reportable would be a solid start.