This morning Treasury released a consultation paper on the proposed three-yearly audit cycle for SMSFs with good record keeping and compliance.
Transitional arrangements
The paper said that transitional arrangements may be needed to “assist the SMSF audit industry to adjust to changes to workflow associated with SMSFs transitioning to three-yearly audit cycles.
One of the transitional arrangements suggested in the paper is to split the SMSF sector into thirds, with staged eligibility for audit between 1 July 2019 and 1 July 2021.
“Another option is to split the SMSF sector on the basis of good record keeping, with more timely and compliant SMSFs eligible on 1 July 2019, and less timely and compliant SMSFs becoming eligible at a later date,” the paper suggested.
Treasury noted in the paper that while this “would reward timeliness and compliance, [it] may be harder to administer.
Eligibility criteria
The paper also stated that eligibility for a three-yearly audit will be based on self-assessment by SMSF trustees.
“However, if the ATO becomes aware that a SMSF trustee has incorrectly assessed their eligibility for a three-yearly audit cycle, has failed to submit a SMSF annual return (SAR) in a timely manner or has failed to procure an audit in a year of a key event, the ATO will notify the trustee that an audit is required and consider further action if necessary,” the paper stated.
Eligibility for the measure will be based on two factors including good record keeping and compliance, and key events.
“SMSFs will have to meet eligibility criteria of timely submission of SMSF annual returns and three consecutive years of clear audit reports to move from an annual audit cycle to a three-yearly audit cycle,” the paper explained.
An SMSF on a three-yearly audit cycle will also need be audited in a year in which a key event occurs, with such audits covering all years since the previous audit.
“If a key event falls in a year when a SMSF is not otherwise required to be audited, the SMSF will be required to obtain an audit before submitting that year’s SAR. An audit conducted due to a key event will be required to cover all financial years since the SMSF’s last audit,” the paper said.
Some examples of possible key events include:
- The commencement of a superannuation income stream by a member for the first time;
- The death of a member;
- The addition or removal of a member;
- Receipt of non-arm’s length income (NALI);
- Commencement or maintenance of a limited recourse borrowing arrangement (LRBA);
- Acquisition of an asset from a related party; investments, loans or leases with a related party; or
- In-species lump sum payments to a member.
“After the occurrence of a key event, if the audit does not result in an ACR, the SMSF may continue to be eligible for a three-yearly audit cycle,” the paper said.
“This means that, as long as no other key events occur in the next three years and the SMSF continues to meet good record keeping criteria, the SMSF will next require an audit three years after the ‘key event’ audit.
Treasury is proposing that an SMSF with a history of three consecutive years of ‘clear audit reports’ be defined as a SMSF without any financial or compliance contraventions issued in an ACR in the previous three years.
“While a ‘clear audit report’ could be defined differently, for example as an unqualified audit report, use of the ACR is straightforward and an existing part of SMSF regulation,” the paper said.
The paper said there are a range of options for what constitutes timely submission of SMSF annual returns including:
- An SMSF that has never submitted a late SMSF annual return
- An SMSF that has not submitted a late SMSF annual return in the last three years; to
- An SMSF without any outstanding SMSF annual returns
“ATO data indicates that the definition of a timely submission of a SAR could have a large impact on eligibility, with 40 per cent of SMSFs submitting a late SAR on at least one occasion in the three financial years from 2013-14 to 2015-16,” the paper noted.
“SMSFs that move to a three-yearly audit cycle will be required to continue to submit the fund’s SARs in a timely manner to remain on a three-yearly cycle.”
Next steps: key consultation questions
Treasury is consulting on a range of questions including how audit costs and fees expected to change for SMSFs that move to three-yearly audit cycles.
It is also seeking feedback on whether an alternate definition of clear audit reports should be adopted and what the most appropriate definition of timely submission of an SMSF annual return is.
It has also asked what should be considered a key event for an SMSF that would trigger the need for an audit report in a particular year, based on what events present the most compliance risk.
The paper also asks for feedback on whether arrangements be put in place to manage transition to three-yearly audits for some SMSFs, and if so what metrics should be used to stagger the introduction of the measure.
The closing date for submissions is 31 August 2018.
More to come.
Over Complicated ODwyer and her Treasury boffins trying to fix a annual audit problem that doesn’t need to be fixed and again adding more complexity.
ODwyer & Treasury, you did not consult the Super Industry properly for your biggest changes to Super in 10 years and you completely and utterly butchered it.
The over complication and lack of real world technical and administrative knowledge is astounding. It’s hard to believe you could have made Superannuation any more complicated than you did.
If they are really concerned about the cost. The ATO levy should be scrapped. Further, they could consider implementing tiers. Eg: If the fund assets are below certain value it can go through a review instead of an audit. Auditing funds once in three yrs will cost the funds more and also it will lead to lot of compliance issues.
It’s most probably a political motivated proposal. It is supposed to be a sort of compensation for the punitive legislation introduced in the last years into the SMSF industry. So our politicians and bureaucrats will be able to show off on the media saying how much they care of the super system, how much red tape they cut…They couldn’t care less of what the SMSF professionals say or what the reality is. If they did we wouldn’t be here discussing the disruption of our businesses. We are a small number of people with no political relevance and it’s clear now that the professional associations haven’t shown much interest in defending with the necessary energy our profession and our role for the integrity of the super system. I’m afraid that the decision has been already made and if professional auditors want to be heard something much more noisy that a submission to the discussion paper should be done.
A terrific example here of politicians and bureaucrats making a system as complex as possible. Count me out! My SMSF has been perfect since 1994 when it commenced, but I am not going to introduce all sorts of new IFS and BUTS about deciding when or when not to do an audit. Whatever happens, I’ll be continuing annual audits for peace of mind.You have to sleep peacefully, and going by the Treasury press release, you might think you are fine with 3 year audits, only to discover they have an issue with something about your decision. Not for me. And further, if you have to get an audit that covers the years since the last audit, what the devil is the purpose of a 3 year audit cycle? Total rubbish. I’d like to know whose votes the government is trying to catch with this policy.
I think this one will get up, and SMSF auditors will need to be proactive and provide the necessary service to the market in whatever form is eventually legislated. Unfortunately, I think it will result in more unnecessary red tape as the ATO tries to keep track of which funds are on which cycle and the inevitable delay in identifying funds that may need to be audited (by the ATO or by an SMSF auditor) after lodgement of the SAR. Look to an increase in the Supervisory Levy to mitigate this. I think there will be a consolidation of the market share so that smsf specialist firms will be advantaged, as will firms that audit their own funds under the protection of adequate safeguards, as they will be able to manage the workflow cycles better or simply impose annual ‘reviews’. Market pressure will surely drive 3 year audit fees down as fewer firms fight for the same size pie and competition, and “fee shoppers” will have incentive to negotiate to the bottom and then just quickly change suppliers at a whim. Efficiencies gained by AI has already reduced audit costs so offshoring may not be as prevalent, however those with the capital to invest in technology have already cut fees to sub $275. There will be time for solo smsf auditors to retain their existing client base and perhaps run out for a few more years, but the times…. they are a changing.
This whole ‘AI’ push is a ruse, an excuse for auditors to not check info and transactions as thoroughly.. A data feed does not mean everything is fine, you would be surprised what you pick up when you physically audit back to the bank statements.
This defies logic, they claim to be consulting but the consultation committee as I understand it was unanimous to Treasury in that they don’t see any meaningful cost savings to Trustees yet see heightened risks to the system. Why on earth would you proceed and which planet is Treasury on. Can the SMSF Adviser do a legitimate article or investigation taking this to task?
[quote=ROBERT]The problem is that the rules are proposed by people that have never been involved in accounting practice let alone the SMSF industry[/quote] Exactly, and a point I have seen in practice at a large accounting firm where banking execs were running the show.. or the circus as I would have called it. SMSF Association is not far behind these days given lack of true SMSF Experience at the top.
The problem is that the rules are proposed by people that have never been involved in accounting practoce let alone the SMSF industry
The resistance from those whose work will be affected is understandable, as the audit industry is now being disrupted (like every other, these days). Taking the core objection at face value, we would need continual audits (like continual disclosure: we know where that got us!).
If triennial audits would not save work or costs as suggested, it gives little credit to trustees and accountants who take their roles seriously. Remember that SMSF lacks the culpability test protection available to APRA funds, risking half the fund assets if declared non-compliant? Also if frequency has no effect on costs, can I ask my SMSF auditor to audit my fund each month for the same fee?
Rewarding documented past compliance with reduced frequency is similar to reducing GP visits during asymptomatic good health. The resistance from some in the profession which itself is not required to have practice accounts peer- audited by another firm, or does not accept responsibility when ASIC, ATO or APRA finds poor quality is ironical.
Life & general insurers and DB funds have their actuarial valuations (more critical to solvency than audits) done triennially, and the actuaries / consumers have no issue there.
The Treasury paper sets out some options to go forward, not nip the idea at birth. Constructive ideas in members’ interest, rather than carping rejection, would be nice.
OK so auditing a fund now you audit 12 months in one hit with one set of financials, auditing every 3 years they are saying the auditor will then audit the 12 months X 3 and verify financial statements X 3 so the work is directly tripled the way I see it. Sure there could be some marginal time savings in the letters and audit report and other areas but there could be additions to time in the fact you are looking at 3+ year old info, documents may then be missing/unavailable and errors in year one will require amendments and further time and cost. If it was simply looking at every third year in isolation and a free pass the other 2 years it would be cheaper but that is not the case here. To suggest auditing monthly in contrast would not impact cost is misguided with all due respect, you would be picking up the fund 12 times more and the accountant would have to prepare an audit file each time, you would have to check balances and income, it would not stack up as it is more work in contrast. This proposal is the same amount of work but just every 3 years as oppose to spreading it out once a year, hopefully you can now see this?
Counter-intuitive to the results of the Royal Commssion where leaving an industry to self-regulate has created a firestorm and litigation is now on the rise against offenders. Will this Government Policy also lead to increased litigation between Trustee/Member/Tax Agent without judicious annual oversight of our auditors. Will this leave our Country without future auditor opportunities due to regulatory changes the same way that our professional Quantity Surveyors colleagues have been significantly affected by legislative changes? The annual audit is a small price to pay for the integrity it value adds to the SMSF sector. One of our largest financial sectors! It is high-time the Government STOP messing with something which wasn’t broken. The advisory process may have been, but the compliance side was working well.
It is worrying the SMSF Association and Lobby Group have been rather accommodating taking a stance of lets work with them as if we oppose it we won’t get anywhere but to be honest this is so stupid I think the hard line should have been drawn. Why help someone slit your throat!
They have found themselves with a conflict of interest having formed an alliance (in regard to the ALP franking credit policy) with external parties who wrongly think this will save them money.
I cannot understand why the ATO have been silent or kept out of the loop, they have long been advocates for annual audits and always underscore the importance of this to the sector. If treasury actually consult with practitioners, ATO and trustees they will find a resounding push back across the board. If this goes ahead it shows how corrupt treasury and politics is and we may as well all give up.
How come the SMSF Association and other bodies supported actuarials so much but zip here, BTW actuarials actually are red tape because the software systems generate them automatically. If you are on Class, BGL, SuperMate you should not need to get an actuarial. I feel there is a body behind this, possibly large banks, they are likely behind a lot of the squeeze being put on SMSF’s to raise costs and complicate the sector in an attempt to push people back to industry/retail funds. We have seen no bank has been able to profitably engage the SMSF Sector so this is their only choice..
To go back 3 years the audit time will likely increase as the quality of files we are given will be messy, Treasury don’t get it that just because a fund is lodged on time and without a qualification far from means that the client is perfectly organised and the audit was a dream to do. Even then there are no cost savings to be had but only heightened risks of breaches and flow on effect issues arising. GET YOUR HEAD OUT OF THE SAND TREASURY!!!
I think as many as possible should take the time to prepare a submission to the Consultation Paper. Treasury is robotic in it’s processes and if you speak outside the framework, it is unlikely to be ‘heard’ by them.
SMSF industry is already going through a lot of changes. Accountants and trustees are still trying to understand and cop up with these changes. Meanwhile, this three-year audit cycle proposal will make it worse. Leaving the decision with SMSF trustees will not help the idea of keeping the funds compliant as SMSF trustees are not aware of all the changes and SIS Act and Regulations. I am wondering if the treasury is consulting practical and knowledgeable people from the SMSF industry…
I don’t understand what this proposal is trying to achieve – cost savings for Trustees? This won’t happen – auditors will lose their efficiency and will have to increase audit fees to stay in business, some smaller audit firms may shut shop reducing competition, there will be an increased period to audit, more likelihood of contraventions, contraventions not being rectified for three years etc etc.
On one hand, we have audits being reduced to once every three years. On the other hand, we now have quarterly Transfer Balance Account Reporting every quarter – what the hell is going on???!!!???
Poor advice and less audits. A perfect storm is brewing for SMSFs.
How does meet the governments policy objectives of cutting red tape and costs? Surely this is more confusing and will require specialist consultation to advise trustees
What is wrong with having your fund audited every year. Just reading this article makes it sound way too hard.
If you can’t afford to have your SMSF audited ever year, well perhaps you shouldn’t have one. How is this making things easier….
Trustees self-assessing non arms length income. How out of touch is treasury?
‘eligibility for a three-yearly audit will be based on self-assessment by SMSF trustees’ – BAHAHAHAHAHAHAHAHAHAHA. This has got to be the most idiotic thing I have ever seen, it defies logic and treasury are clearly out of touch with the industry. Anyone who supports this or thinks it is a good idea has rocks in their head, simple as that! And the SMSF Associations complete lack of noise and opposition is pathetic and shows their true colors. The fact all 3 years are sill audited means there are effectively no time savings or cost savings to be had, how hard is this for treasury to understand.
Yes couldn’t agree more. The silence is deafening….
I agree, just reading it gives an headache. Who proposed this craziness must live in another planet. I’m curious now to read the reactions of all the professional accounting bodies, including SMSFA, to this proposal, if they have the gut to call it for what it actually is. But I’m afraid you’re right, they have the same colors of the bureaucrats that designed it
what about just leaving the SMSF sector alone for a few years….?..what about ‘cutting red tape’ instead of adding mountains of red tape to an already ‘overtaped’ sector…?
A nice by product of that would be that It would free up treasury boffins to do something more productive