The reporting obligations of SMSF auditors are more important than ever under the new ATO penalty regime. Ashley Course examines when an auditor contravention report requires lodging.
It might seem simple, but when examining what and to whom the auditor is required to report, the question may not in fact be that straightforward.
And with the potential for significant trustee penalties from 1 July 2014 resulting from the new Australian Taxation Office (ATO) penalty regime, the need for auditors to correctly report contraventions is more important than ever.
It is also important for the auditor to understand the scope and reporting requirements of a qualified auditor’s report (QAR) and an auditor contravention report (ACR) differ and there will be some issues that require reporting in a QAR but not an ACR and vice versa.
Another important concept for the auditor to understand is the concept of a ‘material misstatement’ and ‘material contravention’, as it is only material misstatements and contraventions that require reporting in the QAR and/or ACR.
Notwithstanding this, the auditor is reminded of the need to communicate all contraventions to the trustees in writing, whether material or otherwise, which is usually reported in the management/trustee letter.
What is the auditor forming an opinion on?
The answer to this question is found in the ATO-approved SMSF auditor’s report. Below is an extract from the 2014 ATO auditor’s report, Part A: Financial Report.
“In my opinion … the financial report presents fairly, in all material respects, in accordance with the accounting policies described in the notes to the financial statements….”
The following is an extract from the 2014 ATO auditor’s report, Part B: Compliance Report.
“In my opinion … each trustee of (name of superannuation fund) has complied, in all material respects, with the requirements of the SISA (Superannuation Industry (Supervision) (SIS) Act) and the SISR (Superannuation Industry (Supervision) Regulations) specified [below], for the year ended 30 June 201X.”
Sections: 17A, 35AE, 35B, 35C(2), 52B(2)(d)-52B(2)(e) 62, 65, 66, 67,67A, 67B, 69-71E, 7375, 80-85, 103, 104A, 109, 126K of the SIS Act.
Regulations: 1.06(9A), 4.09, 4.09A, 5.03, 5.08, 6.17, 7.04, 8.02B, 13.12, 13.13, 13.14, 13.18AA of the SIS Regulations.
Reporting material misstatements and contraventions in a QARMaterial misstatements in the financial report and material contraventions of the above SIS requirements are reported to the trustees in a QAR. Whether a misstatement or contravention is also reported to the ATO in the ACR will be discussed later.
The auditor is responsible for determining what a material misstatement or contravention is for the purposes of the SMSF auditor’s report based on the requirements of the Australian auditing standards, Australian accounting standards and auditing standards on assurance engagements.
The auditor shall assess what factors might influence the decisions of the intended users. In most instances it is usually only the trustees that are the users of the SMSF auditor’s report, and therefore the auditor shall consider what misstatements and contraventions, if any, the trustees would consider significant. It is our opinion misstatements and contraventions the trustees would consider significant are those that would, or could, lead to materially adverse ramifications, primarily ATO penalties or taxation consequences.
Reporting contraventions in the ACR
Before proceeding, we must point out that apart from assets not recognised in the financial statements at market value, material misstatements of the financial report are generally not required to be reported to the ATO in the ACR. However, that does not mean material misstatements of the other items in the fund’s financial statements are not required to be brought to the ATO’s attention.
For instance, if the auditor discovers a financial statement item, for example, tax expense, is materially misstated, the auditor would ordinarily ask the trustee/accountant to fix the misstatement and provide the auditor with a revised financial report. If the trustee/accountant fails to do so, it is not the misstatement that is reported to the ATO in an ACR, it is a contravention of section 35C(2), failure to provide the auditor with documentation required within 14 days, it is the amended financial report, that is reported to the ATO in the ACR.
Therefore, for the purpose of the ACR, generally only certain material contraventions of the SIS Act and SIS Regulations require reporting to the ATO.
Unlike the auditor’s report, in which the auditor is required to use professional judgment when determining materiality, for the purposes of the ACR it is the ATO that determines materiality.
What the ATO considers to be a material contravention is explained in the document, “Completing the Auditor/actuary contravention report”. The document provides a seven-test reporting criteria setting out what contraventions the ATO considers material.
For those contraventions considered material in accordance with the seven-test reporting criteria, the auditor is required to report such contraventions to the ATO in the ACR.
It is important to note the list of reportable contraventions in the above document contain fewer SIS Act and SIS Regulations provisions than contained in the ATO auditor’s report.
These differences are discussed below.
Differences between the auditor’s report and ACR
As discussed above, there will be contraventions required to be reported to the trustees in a QAR but not an ACR and vice versa
Two main reasons being firstly not all the SIS Act and SIS Regulations provisions contained in the ATO approved auditor’s report are specified for the ACR document and are therefore not required to be reported to the ATO.
To determine the difference, the auditor should compare the SIS Act and SIS Regulations provisions listed in the ATO approved auditor’s report and those referred to in the
“Completing the Auditor/actuary contravention report”.
Secondly, the concept of materiality differs between the auditor’s report and the ACR, that is, it is the auditor who determines material misstatements and contraventions to include in a QAR, but it is the ATO that determines materiality for the purpose of the ACR.
Common situations where contraventions may require reporting in a QAR but not an ACR
Please note this is not an exhaustive list. You should refer to the difference between the SIS Act and SIS Regulations provisions in the ATO auditor’s report and the ACR document.
Note also while the seven-test process may preclude an ACR, the auditor has the ability to use their professional judgment in determining whether an ACR is required.
1. Section 52B(2)(e) of the act requires the trustees not to enter into any contract, or do anything else, that would prevent the trustee from, or hinder the trustee in, properly performing or exercising the trustee’s functions and powers.
This may arise should the trustees fail to comply with the fund’s trust deed. If the auditor considers a failure to comply with the fund’s trust deed as a material contravention, they should issue a QAR, but as this section does not appear in the ATO’s ACR document, no ACR is required.
2. SIS regulation 1.06(9A) provides the pension standards. Should the trustees fail to comply with the pension standards, that is, they underpay the minimum amount or add to the capital supporting the pension, this causes a contravention of the pension standards that is likely to result in a QAR.
However, as regulation 1.06(9A) does not appear in the ATO’s ACR document, it is not required in an ACR. But the implication is the fund loses its exempt pension income concession and the tax expense/liability needs to be amended. Furthermore, if the only condition of release met by the member receiving the pension was ‘preservation age’, a contravention of regulation 6.17 may arise as the payments made during the year would need to be reclassified as a lump sum and the members are not permitted to withdraw a lump sum for such condition of release.
Common situations where contraventions may require reporting in an ACR but not a QAR
1. Section 65 of the act, lending or providing financial assistance, is consistently the most commonly contravened section of the superannuation laws, usually arising from the trustee paying non-fund expenses from the SMSF’s bank account.
Should such a contravention be identified, irrespective of the amount, and if this contravention has previously occurred and been reported to the trustees, test 3 of the ACR document requires the auditor to report it in an ACR irrespective of the value. Take a situation where the trustees of an SMSF with total assets of $500,000 accidentally paid a non-fund expense of $165.
While this amount represents just 0.033 per cent of the fund’s total assets, if this contravention had previously occurred, the auditor is required to report it in an ACR. However, the auditor may not consider this material as it would not influence the decisions of the trustees and therefore not include it in a QAR.
2. Section 67, governing borrowing, is also a commonly contravened section of the act often occurring because of an overdrawn bank account. Again, should the trustees have previously contravened this section, in accordance with test 3 of the ACR document, this would require reporting in an ACR, however, the auditor may not consider this material as it was only for $75, and therefore not report it in a QAR.
3. For new SMSFs, that is, those established within the previous 15 months, any single contravention over $2000 is required to be reported in an ACR.
Were a fund to have total assets of $1.5 million, a contravention of $2001 would represent just 0.13 per cent of the fund’s total assets, and otherwise appear clearly trivial.
In this instance, while the contravention would require reporting in the ACR, it is up to the auditor to determine whether to report it in a QAR.
Apart from the ATO’s ACR document, which defines materiality and provides a prescriptive list of reportable contraventions, the decision to issue a QAR in regard to the specific SIS provisions listed in the auditor’s report is that of the auditor. In determining materiality, the auditor should consider the needs of the user. The main users of the auditor’s report are the members and trustees, and therefore the auditor should consider whether the contraventions would have a significant impact on the members/trustees. Also remember that even if a QAR/ACR is not required, all contraventions are required to be reported to the trustees in writing, usually in the management/trustee letter, irrespective of the value.