Auditors should be prepared to carefully examine the activities of all parties indirectly or directly involved in an SMSF property development scheme to prevent the fund from triggering the non-arm’s-length income/expenditure (NALI/E) provisions, according to a technical specialist.
Accurium head of education Mark Ellem acknowledged establishing if a respective property development arrangement undertaken by an SMSF or its interposed entities had breached the NALI/E rules had become increasingly challenging for auditors since the ATO signalled its intention to intensify scrutiny in this area with the release of Taxpayer Alert 2023/2.
“In the scenario of the tax payer alert, we had two SMSFs. One owned 50 per cent of the issued shares in the first company, which is XYZ. The other SMSF, which is not related, owned the other 50 per cent. [The example] in that taxpayer alert wasn’t from direct activities conducted by the SMSF, it was indirectly down the line by two entities,” Ellem told attendees of a webinar held last week.
“So as the SMSF auditor, how far are you going to go to investigate whether the SMSF has derived non-arm’s-length income?”
He suggested auditors scrutinise the actions of entities engaged in property development against the Superannuation Industry (Supervision) (SIS) Act, in addition to verifying the provision of key documentation confirming the fund’s compliance with obligations.
“We want to first determine whether it’s a related company and start at it from a SIS perspective. What are the SIS issues here? [For example], is the investment in the company a related company? We’d probably follow through the investment of the first company, XYZ, interposed entity through to new interposed entity. And as part of this investigation we’d ask about the activities of these entities,” he said.
“Now with the audit, from a NALE perspective, it’s a Part A issue. That is, they’re looking at the provision for tax and whether it’s understated. So that’s what the auditor [should be] looking at.
“Start with looking at the SIS issues there. And the SIS issues should at least raise your antenna with regard to any potential non-arm’s-length income issues.”