The government proposes to extend the annual SMSF audit requirement to a 3-year cycle. The benefits are meant to be less red tape and lower costs, but there are concerns that this may not be the outcome.
If you don’t have a self-managed super fund (SMSF) yourself, then almost certainly you know someone who does. There are over 596,000 SMSFs in Australia as of June 2018, according to APRA. The majority of these are 2-member funds run by spouses, ie family members. The SMSFs have assets totalling over $750 billion, or about a quarter of all superannuation assets. The numbers are impressive.
There have been movements recently about how often SMSFs should be audited and the proposed changes could have an impact on the hip pocket of fund members, which means they deserve attention.
Funds have to be audited and auditors have to be held to account, as demonstrated in the recent case of Cam & Bear v McGoldrick. This case involved an SMSF for a doctor and his wife, which did not have its own bank account. Instead, it would provide cash payments to the fund’s investment manager. The doctor understood that this money was on-lent to an entity related to the fund manager, to obtain a higher rate. Such money was listed in the accounts as “cash”. In fact, the assets of the associated entity were primarily unlisted assets for which there was an excess of liabilities. It hit trouble and an administrator was appointed, and the SMSF lost over $950,000. The NSW Court of Appeal ruled that the auditor was negligent for failing to qualify the audit report – in this case “cash” did not mean money in the bank. This would have helped the fund members understand their true position.
Will fewer audits mean less cost?
For each income year, an SMSF trustee must appoint an approved SMSF auditor (registered with ASIC) to give the trustee an audit report in the approved form. The Government has proposed to extend what is an annual audit requirement to a 3-yearly cycle, which will apply to funds with a history of good record-keeping and compliance. Eligibility for this will be based on self-assessment by SMSF trustees. The justification for the change was that it will “reduce red tape”. A government discussion paper pointed to a potential reduction in administrative costs and auditor fees for funds – based on the logic that less frequent audits mean less cost.
Unfortunately, it’s not so clear-cut.
Firstly, auditors will have to audit the financial statements for each of the 3 years within the period. In other words, Years 1, 2 and 3 will still have to be audited – but now will be covered in a single report. This means that the amount of work that has to be done remains the same. Gathering evidence going back 3 years – rather than 12 months – can be more expensive, so the projected cost savings may not be as good as the government hopes. It may only turn out to be at best a cost deferral – and in fact, may lead to higher fees.
There is also concern that extending the cycle to 3 years may cost funds more in the long run.
If the proposal is implemented, material errors in the financial statements may have a shelf life or up to 3 years, rather than 12 months. The mistake can also be compounded, in that a fund could make a mistake not just in a single year, but in each of the 3 years before it comes to the attention of the auditor. This can result in more audit resources and more fund administration time to correct – as well as increased penalties for serious breaches – which will all add to cost.
Let’s take an example of, say, unpaid rent from a related party. Small contraventions are not reportable if they are under the Auditor Convention Report reporting thresholds of more than $30,000 or 5% of the fund’s total assets. Such a contravention could be rectified when picked up by the auditor without reporting. However, if the contravention remains unrectified in Years 2 and 3, it may be more difficult to fix and also become reportable.
The importance of fund trustees having good auditors and advisers cannot be underestimated. Thomson Reuters offers a suite of superannuation solutions to help you provide your clients with trusted advice on the compliance status of their fund, and in setting up an SMSF: for compliant documentation, see our Cleardocs superannuation package, while our renowned Australian Superannuation Handbook offers a comprehensive guide to all things super.