Can the new SMSF audit cycle be justified?

Hidden among the mountain of budget papers was a proposal to allow SMSFs to move from an annual audit cycle to a three-year cycle from as early as 1 July 2019.

The measure will apply to funds with a good history of compliance, which is loosely defined as three consecutive years of unblemished audit reports and timely lodgement of annual returns. No one saw this coming and the only policy rationale provided in the budget papers was a reduction in compliance costs.

At first there was uncertainty around whether you audit one-year every three years or all three years at the one time each three-year cycle. Now that it has been confirmed the auditor needs to effectively audit all three years, most, including us, are questioning the assertion trustees will be better off from a compliance cost perspective in the long run.

Most see the measure as a cost deferral at best that could end up costing trustees more in the long term, especially if there are contraventions in the intervening years that need to be rectified retrospectively.

Even the most compliant trustees may inadvertently do something that contravenes the Superannuation Industry (Supervision) Act, which is not hard to do given the complex superannuation rules in place. Then there are the compliant trustees who exhibit behavioural changes knowing that no one is looking over their shoulder and venture down a path of intentionally breaking the rules to gain some personal advantage.

A well-functioning SMSF sector is a by-product of good regulation. The annual independent audit requirement provides the regulator with assurances that SMSF trustees are operating within the rules. History tells us that leaving trustees to their own devices invites trouble that ultimately leads to more regulation for all trustees in the long run.

Not all breaches by trustees end up being reported as contraventions. Also, many funds receive a management letter that outlines minor compliance issues, preventive advice or education advice from the auditor. Without this check and balance, and a delay in receiving this type of advice, future compliance issues may occur that could have been avoided.

As a starting point, the government has not provided any evidence to substantiate its policy rationale that the measure will reduce compliance on trustees. Certainly for some SMSFs with relatively straightforward circumstances, there may be some merit in assuming the three-yearly audit cost will reflect some efficiencies and will be less than the sum of three years of annual audit outlays.

Tony Greco

"Even the most compliant trustees may inadvertently do something that contravenes the Superannuation Industry (Supervision) Act, which is not hard to do given the complex superannuation rules in place."

Tony Greco

As soon as you move away from SMSFs with relatively simple affairs, you start to wonder how well the policy rationale holds up even for funds with good compliance history and timely lodgement performance. Loss of documents, poor record-keeping leading to not remembering certain transactions, change in service provider and accessing records, and compliance breaches are some examples of where the three-year audit could easily become more time consuming and expensive.

Diligent document keeping and ensuring three years’ worth of records are readily available and stored in a format and location where they can easily be accessed will be essential. It is quite common for accounting practices to use lower-paid staff to do a lot of the administration grunt work with the expectation auditors will pick up any irregularities. This practice may result in more senior staff having to review SMSF accounts before returns are lodged, which could add cost to the annual return process.

Even if the policy rationale holds up, we are more concerned about the risks it introduces into the SMSF regulatory environment. SMSF audits are required to ensure trustees play by the rules, which then entitles the fund to valuable tax concessions. The ATO relies heavily on SMSF auditors to undertake the heavy lifting in ensuring trustees comply with their onerous trustee obligations.

Will the annual return for funds that meet eligibility criteria for a three-year audit cycle be expanded to flag possible irregularities in the intervening unaudited years?

Some preliminary concerns that will need to be addressed include:

  1. Related-party acquisitions, particularly in-specie contributions for unlisted assets to manipulate contribution caps.
  2. Loans to members.
  3. Fraud risk from unscrupulous spruikers targeting unsupervised SMSFs.
  4. Elder abuse, which is on the rise and could potentially be amplified.
  5. Safeguarding of assets to ensure they are held in trust for the superannuation fund.

The above list is by no means exhaustive. It begs the question whether the small savings to be had are worth the loss in integrity of the SMSF system.

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