SMSF auditors who cannot gain sufficient transparency into the finances of a fund in regards to non-arm’s-length expenditure (NALE) are likely to seek wider declarations that nothing remains undisclosed in an effort to protect themselves, according to one auditor.
ASF Audits head of education Shelley Banton said in circumstances where SMSF auditors were unable to detect exactly what took place in a fund from an expense point of view, they may take steps to protect themselves from possible litigation in the future.
“One way to potentially do that is expanding on the trustee representative letter, which at the moment usually has a fairly rudimentary comment which states everything has been undertaken at arm’s length,” Banton told selfmanagedsuper.
“Should we be looking at expanding that to include those NALE events which we may or may not know about? Do we ask for a separate trustee declaration? Do we require, in relation to NALE, to bump up our trustee outcomes engagement letter?
“These are all things that we need to take into consideration and get under our belt, not only because the application of NALE applies to specific assets at the moment, but as we’re moving towards 2023 we need to consider those non-arm’s-length general expenses in relation to all of the fund income, which will then come into play.”
She said auditors were becoming concerned as knowledge of the scope of the NALE provisions varied across SMSF advisers and trustees, leading to an absence of information.
“In some circumstances how are we going to be able to look at what’s in the operating expenses for the fund and ask the right questions in relation to whether they are a commercial rate or if there is an expense missing?” she said.
“I’m not talking about the more blatant expenses, which are contained within the law companion ruling (LCR) for NALE, such as accounting fees or property fees, which are easy to see, but, for example, where services have been provided by the trustee to the fund.”
She said while discussions were continuing to take place between industry professional bodies and the ATO, the latter’s stance in its finalised LCR is of concern.
“The ATO has said they are not putting out any further explanatory memorandums at the moment on the LCR, so we are going to navigate through this on our own and it’s a minefield because of the contradictions that are contained within the LCR, where we do need further guidance from the ATO,” she said.
