The ability for SMSF auditors to make a call about flagging concerns around non-arm’s-length expenditure (NALE) breaches on the basis of materiality may be a compromise position for the sector, according to the SMSF Association.
Speaking at the industry body’s Technical Summit 2023 on the Gold Coast today, SMSF Association chief executive Peter Burgess said NALE breaches were not a Superannuation Industry (Supervision) Act compliance issue and so the decision to disclose a NALE breach was at the discretion of an SMSF’s auditor.
“These are not contraventions and if trustees fail to disclose this two-times shortfall amount in their annual return, it’s not something that results in a contravention report being lodged to the ATO,” Burgess said.
“It will all come down to whether the auditor believes the accounts fairly represent the financial position of the fund.
“Auditors will make a decision and are going to have to look at this from a materiality point of view, and you would expect in most cases, the two-times shortfall is not going to be material so they may take no action.”
He questioned whether this approach towards auditing the materiality of NALE was a compromise directed towards the SMSF sector.
“The question for the industry is have we been given an olive branch? Have we been given an out?” he said.
“We have moved from a situation where all the income of a fund may have to be subject to NALE if we don’t incur a general expense on arm’s-length terms to a situation now where it’s just a two- times shortfall.
“As we see by virtue of materiality, it’s probably not something the auditors are going to be concerned about.”
He added, however, that even if auditors do not flag NALE on the basis of materiality, trustees still had to report NALE or face compliance action by the ATO.
“We still need to be aware that trustees have an obligation to comply with the law and which says they have to report and disclose the two-times shortfall if they have non-arm’s-length expenditure,” he said.
“The ATO has said they will be looking to see if trustees make a reasonable attempt [to report NALE breaches].
“[While] auditors may not be concerned about it, trustees still run the risk that if their fund is audited by the ATO and the ATO identifies non-arm’s-length expenditure that wasn’t reported, they may face tax penalties.”