Putting the SMSF brakes on three-year audit cycles
One of the critical points ignored in the debate around the three-year audit measure is the conflict of interest issue it poses for SMSF trustees.
We’ve heard many reasons why the three-yearly audit cycle won’t reduce red tape or SMSF audit fees, and how it will increase the burden on SMSF trustees resulting in more auditor contravention reports (ACRs).
But the SMSF industry has ignored one critical reason as to why this proposal is inherently dangerous: the conflict of interest that SMSF trustees will face if introduced.
Conflict of interest
SMSF trustees are not expected to be superannuation experts, but they are required to be responsible for the operation of their fund and assessing their actions in relation to key events to qualify for a three-year audit cycle.
Self-assessment provides the grounds for a conflict of interest for trustees between their duties as a trustee and their private interests, which could improperly influence the performance of their official duties and responsibilities.
Trustees are ultimately responsible for the prudent management of their super fund. The incentive to maintain an SMSF as a complying super fund is to ensure the fund continues to receive favourable concessional tax treatment.
At all times, a trustee of an SMSF must act in accordance with:
- The provisions of the SISA and SISR
- The SMSF trust deed rules and provisions
- Other rules imposed, for example under Taxation law and Trust law
The Super System Review determined that while the fear of being made non-compliant for taxation purposes acts as a deterrent to significant non-compliance, its deference factor diminishes as the level of non-compliance reduces.
Under a three-year audit regime, the time lag to manage non-compliance will significantly contribute to increasing the non-compliance gap without an annual audit.
A conflict of interest provides the risk of a compliance breach being ignored or identified. It may be too late for a fund to remain compliant depending on the length of time passed since the previous audit, as well as the extent of the breach.
In some cases, a situation that looks like a conflict of interest may be enough to be detrimental to the superannuation sector, even if there is no conflict or it has already been resolved.
Identifying key events
A three-yearly audit cycle provides an opportunity for a higher risk of non-compliance. Key events, therefore, need to foster transparency and confidence in the superannuation system.
A trustee’s ability to understand what constitutes a key event will be critical to the ongoing integrity of the superannuation system. Writing the key events in plain English will be fundamental to empowering trustees in self-assessing correctly.
Conflicts of interest come in all shapes and sizes. One of the most common examples is where an SMSF trustee illegally accesses funds without meeting a cashing restriction. There are a variety of reasons for this decision; the most notable is supporting a related business experiencing cash flow issues.
A conflict of interest arises because any incentive for an SMSF trustee to report the fund as being ineligible for a three-year audit is significantly less than the fear of being caught.
Under these circumstances, most SMSF trustees would listen to their inner “business owner”; ignore the breach and buy more time to rectify the situation.
A delay in identifying compliance breaches means they will be more difficult to rectify and will lead to increased costs and compliance burden.
Longer non-lodgement times
As a result, we may see extended periods of non-lodgement as the three-year time frame provides trustees with an excuse to “switch off” and ignore the compliance aspects of their funds on an annual basis.
Trustees may also genuinely miscalculate the time between the fund’s three-year audit and end up inadvertently triggering an annual audit, despite their best intentions.
Even more extended periods of non-lodgement may occur where a trustee does not use a tax agent or SMSF professional to oversee their actions and running of their fund. To this end, the proposed three-year audit cycle policy is effectively underwriting the risk of SMSF failure via the social security system.
The Super System Review also outlined the belief that trustees who were less well‐equipped to cope with the responsibilities and disciplines inherent in running an SMSF could lead to serious public policy concerns for the sector.
Such a development could see a call for more severe regulatory restrictions on all SMSFs, which would be to the detriment of all existing members and the sector overall.
The implementation of a three-year audit cycle will inevitably detract from the integrity of the sector. It’s not acceptable that the proposal benefits the few; it needs to benefit the many and the sector overall for it to be good policy.
There are many other methods of reducing costs and red tape within the SMSF industry, such as not forcing a fund in full pension mode to obtain an actuarial certificate.
It’s essential that the SMSF brakes are put on this three-year audit cycle proposal before it’s too late to stop the inevitable crash.
Shelley Banton, executive general manager, technical services, ASF Audits