Super Clarity provides new auditor guide

SMSF consulting firm Super Clarity has released an information sheet on its website to assist auditors dealing with non-arm’s length transactions and their interaction with the sole purpose test obligation.

Specifically, the new guide addresses compliance issues with section 109 of the Superannuation Industry (Supervision) (SIS) Act, regarding arm’s length transactions, and section 62, that covers the sole purpose test, of the same piece of legislation.

With regard to section 109 of the SIS Act the sheet outlines what good evidence looks like to allow auditors to make an assessment of whether the obligations under law have been met.

To this end it lists actions such as securing an independent valuation or appraisal at the time an asset is acquired, ensuring contracts like lease agreements are executed on commercial terms, sighting proof issues such as rent relief and arrears management being carried out on commercial terms, and confirming the minutes and resolutions reflect how SMSF trustees determined transactional conditions and how they considered any relevant alternatives.

In addressing issues with section 62 of the SIS Act Super Clarity not only provides a list of factors that support compliance with the sole purpose test has been satisfied, it has also outlined elements that indicate a breach of this legal requirement may have occurred.

Here the guidance suggests auditors should be wary as to whether any current-day benefits are present as part of a particular transaction, and if so recommends these professionals determine if trustees sought or negotiated for the benefit, the benefit influenced the decision making process regarding the investment, and the benefit was provided at a cost to the SMSF.

The information sheet then notes the interaction between these two sections of superannuation law recognising transactions executed on a non-arm’s length basis often signal a current-day benefit is involved, and ‘sweetheart’ rental arrangements and uncollected rent often point to a breaches of both section 109 and section 62 of the SIS Act.

“Given the ATO’s continued scrutiny in this space, it’s essential to ensure that all transactions involving an SMSF are conducted on commercial terms,” Super Clarity director Shelley Banton said.

“Where they’re not, the non-arm’s length income provisions can apply, potentially resulting in income being taxed at the top marginal rate,” she warned.