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Beware the full force of the regulatory radar

By Shelley Banton
March 09 2016
3 minute read

SMSF professionals who push the boundaries can no longer hide under the misconception that they aren’t being watched – they are.

As auditors and practitioners alike are well aware, the simplest measure of SMSF success is fund compliance. Nothing will compensate SMSF trustees (not even the best investment returns) when a fund is made non-compliant and taxed at the highest marginal tax rate.

That’s why it is important that SMSF trustees have access to a team of highly experienced SMSF professionals, including a fully independent SMSF auditor. Being guided safely through the myriad SMSF rules and regulations means that future retirement income remains safe and secure.

There’s no legislation to prevent SMSF trustees from making risky investment decisions, such as investing in that Hong Kong IT company about to hit the big time. Or thinking that you can beat the derivatives market at its own game. But it’s important to know that choosing a wrong SMSF step can result in SMSF trustees paying hefty penalties and, ultimately, being non-compliant.

Also, SMSF professionals continue to play a critical part in the integrity of the SMSF industry by ensuring that SMSF trustees do the right thing.

But since these professionals come in all shapes and sizes, who’s making sure that they’re getting it right?

ASIC has no qualms about disqualifying or banning those who don’t play within the SMSF sandbox. There are regular media reports – too regularly it seems – about SMSF auditors, accountants and financial planners who are no longer allowed to practise.

The ATO is also working to stamp out questionable SMSF professionals and will refer them to ASIC and/or their professional bodies where necessary.

With the losers ultimately being SMSF trustees, it’s important that those within the SMSF industry are well-trained specialists, keep up to date with their CPD and abide by all the rules.

Within the SMSF profession, reputation is everything. Those who cut corners, as in any industry, will eventually get found out and lose clients in the long run.

It’s difficult to imagine that a reputable SMSF practitioner would refer clients to an SMSF auditor who provides a signed audit report only 10 minutes after receiving documentation.

The SMSF food chain is now closely monitored by the regulators to ensure that the benefits of SMSF trustees are being safely preserved for their retirement.

Getting your house in order

If you’re an SMSF practitioner, make sure your house is in order because the ATO may be knocking on your door very soon.

New data matching capabilities and standards will ensure those who don’t abide by the rules will be contacted by the ATO for review and investigation. They may be also referred to their professional body and/or ASIC where necessary.

With the media regularly reporting on disqualified and banned SMSF professionals, there are serious outcomes for SMSF practitioners cutting corners.

Here are five reasons why the ATO may contact SMSF practitioners:

1. Lodging the SMSF annual return prior to the audit report being completed. This is an unacceptable practice and a red flag to the ATO to contact the SMSF practitioner. Be aware that SMSF auditors are also being urged to report this issue in Section G of the auditor contravention report.

2. Misusing SMSF auditor details in the SMSF annual return. The ATO is currently investigating 20 cases where the tax agent has charged the trustee for an audit that never occurred. The ATO has confirmed that the consequences will be serious when this happens.

3. Questioning the independence of tax agents also acting as SMSF auditors. Independence and ‘Chinese Walls’ in two partner practices is a high area of focus and concern for the ATO. They will be contacting these practitioners to ensure independence requirements are maintained. Where independence is an issue, the ATO will be referring them to ASIC.

4. Charging low SMSF fees (including the audit fee) for an SMSF with complex investments. The ATO is looking at SMSFs with low fees but containing assets that are extremely complex. This would indicate that the size and scope of work required is greater than the low fees being charged. They are concerned about SMSF compliance in these cases.

5. Applying undue pressure on SMSF auditors not to report contraventions. The ATO are interested in the percentage of ACRs lodged by SMSF auditors compared with all auditors (approximately two per cent). Where there are no contraventions lodged, the ATO will investigate. The matter is also being reviewed in light of the independence issues identified above.

Indpendence issues are currently the biggest area of concern for the ATO. They are testing the integrity and independence of the SMSF system by looking at:

• Fund name versus the names of members
• Tax agent name vs audit firm name
• Number of contraventions
• Information on the firm and individual tax affairs

The best way to avoid an ATO investigation is to review SMSF compliance and independence within your practice.

Shelley Banton, director, SuperAuditors