A senior practitioner in the sector has reminded auditors their processes must include an assessment as to whether a situation triggering the non-arm’s-length income (NALI) and non-arm’s-length expenditure (NALE) rules has occurred in an SMSF.
To this end, Peak Super Audits managing director Naomi Kewley stipulated SMSF auditors cannot dismiss the occurrence of NALI as an issue that is solely the domain of the fund’s tax agent.
“Tax agents have a duty to make sure that NALI is classified correctly in the [SMSF] annual return [and] the tax agent is simply expected to get this right and report it correctly. There is no room for interpretation or friendly negotiations here,” Kewley told attendees of the SMSF Association Audit Day 2026 held online yesterday.
“Now the SMSF auditor does not express an opinion on the annual return. We do, however, express an opinion on the tax provision. And if NALI has not been properly recognised in the return, it is not going to flow through and present correctly in the [fund’s financial statements].
“[It means] the tax provision will be wrong and that is an auditor problem.
“So we SMSF auditors must assess whether NALI has been incurred. This is not a problem that we can just hand over to the tax agent and shut off our eyes and ears and pay no attention [to it]. No, we actually do have to perform an assessment here. We need to see if NALI is occurring and if NALI is occurring in the fund, we need to evaluate whether the tax provision is correctly stated.”
She pointed out the presence of NALI in an SMSF, even if it has not been reported properly in the fund’s annual return, may not require significant action from an auditing perspective.
“Sometimes an SMSF may have incurred NALI that has not been recognised correctly in the return or tax provision, but, if the effect is not material, the auditor is just going to document this in their conclusions and move on,” she explained.
“As auditors we are only worried about [a] material misstatement of the tax provision. {But] if that tax provision is materially incorrect due to a failure to recognise NALI, then the auditor has an obligation to qualify [their] Part A audit opinion – so [the] opinion relating to the financial statements.”
Darin Tyson-Chan
Editor
Darin is the founder and publisher of Benchmark Media, an independent publishing house whose mastheads include financialobserver, selfmanagedsuper and smstrusteenews. He has been covering the financial services space for over a decade and in this time he has worked for a variety of trade publications. Darin has also written for the Money section published in The Sydney Morning Herald and The Age.
Articles by Darin