ATO, Auditing

ATO confirms auditor report NALE requirements

SMSF auditors NALE

The ATO has stated SMSF auditors are not required to modify their independent reports with respect to NALE where the compliance approach in PCG 2020/5 applies.

The ATO has confirmed SMSF auditors are not required to amend their opinion in part A of their independent auditor’s report (IAR) where the compliance approach for non-arm’s-length expenditure (NALE) in Practical Compliance Guideline (PCG) 2020/5 applies.

Citing a lack of clarity among auditors regarding their obligations with respect to the transitional compliance approach to NALE, the regulator said the usual requirement for SMSF auditors to apply draft Law Companion Ruling (LCR) 2019/D3 and modify part A of their IAR in the event of a fund incurring non-arm’s-length income (NALI) would not be enforced for the 2019, 2020 and 2021 financial years.

“We recognise that the view in draft LCR 2019/D3 and the compliance approach in PCG 2020/5 may be creating some uncertainty for auditors in relation to their audit and reporting obligations,” the ATO said in an update on its website.

“As such, the ATO advises that SMSF auditors do not need to modify their opinion in part A of the IAR for the 2018/19, 2019/20 and 2020/21 income years in respect of NALI incurred by a fund of a general nature that has a sufficient nexus to all ordinary and or statutory income derived by the fund, for which the ATO’s transitional compliance approach in PCG 2020/5 applies.

“Auditors will still need to consider modifying their opinion in part A of the IAR where the fund incurred NALE that directly related to the fund deriving particular ordinary or statutory income as the compliance approach in PCG 2020/5 does not apply.”

The regulator also noted it was in the process of finalising content for draft LCR 2019/D3, which had been delayed due to the impact of the COVID-19 pandemic.

“The final ruling will provide further clarity around our position on the application of the NALI provisions to non-arm’s-length expenditure of a general nature,” it added.

Last week, the ATO announced it had changed its stance on auditors reporting contraventions within an SMSF that occurred due to COVID-19-related relief and will now require them to include those contraventions in their independent reports.

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