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Why auditors ask so many questions

By David Saul
November 30 2016
3 minute read
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Why auditors ask so many questions
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Adopting the approach of auditors and actively questioning SMSF clients about their fund has significant benefits for SMSF professionals and their clients, particularly in relation to keeping the fund compliant.

Why all the questions?

The other day, a fund trustee asked me, “Why all the questions? He went on to infer that auditors make work for themselves. Under my breath, I muttered, “I’d prefer not to ask so many questions”.

Shortly after, an accountant suggested that auditors are only protecting themselves against negligence claims. Why does no one consider that asking questions protects members, trustees and the assets of the fund?

Let’s consider some common breaches:

  1. a) A fund has lent money to a member, infringing SISA Section 65;
  2. b) A business is being run from within the fund, breaching SISA Section 62;
  3. c) The trustees buy an asset which provides a personal benefit to a member (e.g. a holiday home), again breaching SISA Section 62; and
  4. d) Assets of the fund are not kept separate from the members’ personal assets, infringing SISA Section 52(2)(d).

If any of these situations occur, the ramifications can be far reaching. For instance, where the fund becomes non-complying:

  • All income and capital gains are taxed at 47 per cent; and 
  • Section 295-320 (ITAA 1997) provides that assessable income will include the sum of the market values, of the fund’s assets, immediately before the start of the income year in which the fund became non-complying, less any NCCs.

For example, an SMSF with two members and has $2 million at the start of the income year. Any of the above breaches could mean the fund is liable to tax of $940,000. The result being, the fund is reduced to $1,060,000.

Alternatively, imagine an elderly widower who has been financially stripped of $900,000 (leaving less than $100,000) through the wayward activities of a financial advisor. This widower is now sitting in your office, in tears, facing an uncertain future in sheer desperation because prior auditors, accountants, financial advisors failed to really ask questions or remember their true role in the fund.

As an auditor, these scenarios are the stuff of nightmares. I understand that we are dealing with the hard-earned retirement savings of many older Australians, but critically, possible avenues for redress. There are several possibilities, depending on the circumstances.

Member action to recover any loss suffered as a result of a contravention

Section 55(3) SISA provides that a person who suffers loss or damage, as a result of the conduct of another person who was engaged in the contravention, can recover the amount of the loss and damage by action against any person involved in the contravention. This could include action against the trustee, relevant accountant or financial advisor.

Civil penalty provisions and ability to seek compensation

Section 193 SISA specifies certain provisions as civil penalty provisions. This includes sections dealing with the sole purpose test, the prohibition on lending to members, the prohibition on trustees borrowing and the requirement for trustees to comply with the in-house asset rules. Section 215 SISA enables a court hearing of a civil penalty proceeding to order payment of compensation in respect of loss and damage resulting from the act or omission constituting the contravention.

Ability to seek compensation from a party other than the trustee

Where a civil penalty provision is contravened by a party other than the trustee, the trustee may, by proceedings in a court, recover from that party as a debt due to the trustee if:

  1. a) That person or another person has made a profit because of the act or omission constituting the contravention, an amount equal to that profit; and
  2. b) The SMSF has suffered loss or damage as a result of that act or omission, an amount equal to that loss or damage.

This applies whether or not the party, against whom the action is ought, has been convicted of an offence in relation to the contravention or had a civil penalty order made against them.

Ability to bring any other claims

Section 219 SISA provides the ability to bring any other claims legally permitted to recover loss and damage. Depending on the circumstances, this might include actions for breach of trust, breach of contract, negligence and misleading conduct.

Given the many SMSFs now established, large amounts of money involved and tightening initiatives by the ATO and ASIC, it would not be unreasonable to expect there could be high potential for litigation in the future. I say this without being a lawyer or having any financial interest in the legal sector.


When your auditor asks questions, remember there are good reasons behind it and it is usually in your best interests. The ATO is often willing to work with trustees, provided disclosure is made and steps are taken to rectify the situation. Co-operation by the administrator, accountant and trustees can go a long way towards ensuring the fund remains compliant.

David Saul, managing director, Saul SMSF