As a lawyer, I do a substantial amount of work advising and representing registered SMSF auditors who are being reviewed by the ATO and/or who have been referred to the Australian Securities and Investments Commission (ASIC).
Accordingly, I was interested to see an article in selfmanagedsuper entitled “Proof of transaction terms a concern” quoting ATO acting deputy commissioner Paul Delahunty as follows: “Section 109 [of the SIS Act] always seems to be on our list of auditor issues each year. It presents itself in a number of forms so there is no catch-all type of transaction we’re talking about here that I can reference or assist you [with], but we do observe it across a broad range of investments and transactions.
“As a general statement I’ll say that the auditors’ deficiency usually stems from not conducting enough, and in some instances any, verification of supporting documentation for transactions [involving items such as] leases, loan documents or purchase contracts to [allow them to] check for commercial terms, understand the nature of the parties to the arrangements when they are related parties and [to review] the market rate of return.”
Delahunty’s comments are consistent with what I see in practice – the ATO, when reviewing registered SMSF auditors, often lists section 109 in the position papers and/or in the regulator’s reasons for referral to ASIC.
In the event of an ATO review of a registered SMSF auditor’s files, I assume the practitioner in question wishes to quickly satisfy the regulator. So here’s a rule of thumb that registered SMSF auditors might wish to consider to help achieve this goal. I stress the following is only a rule of thumb. It is not my view of the law. It is not my view of industry practice.
The rule of thumb is as follows. For each SMSF real property asset, retain on the audit file full copies of all executed lease(s) covering the entire financial year. This should be the case even if:
- the real estate is residential,
- the tenants are unrelated, and
- there is an annual statement from an arm’s-length ‘name brand’ real estate agent.
I reiterate the above is only a rule of thumb, is not my view of the law and is not my view of industry practice.
I can think of many situations where a registered SMSF auditor properly fulfils their duties without having such full copies on file. Nevertheless, this rule of thumb can greatly assist in quickly satisfying the ATO.