Auditing, NALI/NALE

New light shed on NALI audit role

SMSF auditors NALI

The onus on SMSF auditors to detect non-arm’s-length income or expenditure in a fund may have diminished after a ruling in the NSW Supreme Court.

A New South Wales Supreme Court case from 2020 has potentially changed the responsibilities SMSF auditors fulfil with regard to assessing and reporting whether a fund has a non-arm’s-length income (NALI) or non-arm’s-length expenditure (NALE) issue to manage.

According to ASF Audits head of education Shelley Banton, the findings from HI Pty Ltd [2020] NSWSC 1638 suggest SMSF auditors may not have to check for NALI when performing their end-of-year procedures.

The case was between the ATO and a taxpayer with an SMSF where the taxpayer claimed the auditors did not inform them the fund had NALI issues that led to problems with insolvency.

“What the judge said was really interesting because he said that the audit report showed that the financials were prepared to meet SIS (Superannuation Industry (Supervision)) requirements rather than focusing on tax compliance, which puts a whole new cat among the pigeons,” Banton said during an adviser webinar she hosted today.

“[This is] because the description of the auditor’s responsibilities and the tests performed for the audit report focused on compliance with the SIS requirements rather than with the tax obligations.

“What the judge also said was there is nothing in the content of those financial reports or the audit report which could have provided the trustees with any basis to believe the fund complied with its tax obligations regardless of whether they read those reports or not.”

She noted the case provides a different outlook regarding the expectations placed upon auditors with respect to detecting and reporting on transactions carried out by an SMSF that may contravene the NALI rules, as it seemed to imply trustees should not believe auditors will or should detect these types of tax legislation contraventions.

“Who knows? It may well be that auditors don’t have to go down that rabbit hole [of having to] question every single expense to the nth degree and at this stage we really don’t know what our procedures are going to be for next year,” she said.

“I’m not saying that we are going to be doing that, but we still have another six months before the ATO lets the NALI [and NALE] cat out of the bag so hopefully we will have more certainty by then.”

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