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- When is an SMSF eligible to opt in to a three-year audit cycle?
- Who is really responsible for identifying trigger events?
- Audit fees will increase if the SMSF audit proposal becomes law
- If the proposal proceeds, transitional arrangements are essential
- Make a submission, or join lobby group
- For more information…
After the initial shock has worn off, and now that Treasury has released a discussion paper outlining the proposed three-year audit cycle for SMSFs, it is time to consider how the proposed measures (if adopted) will be rolled out, and how these measures will affect both the SMSF sector and the obligations of SMSF trustees.
On the one hand Government has acknowledged that SMSF trustees “appropriately” face a number of regulatory requirements in administering their self-managed funds, but on the other hand the federal government has noted it is committed to reducing red tape and the compliance burden for SMSF trustees.
As a specialist SMSF auditor I consider the reference to auditors as simply “red tape” professionally offensive, and I consider laughable the suggestion that bundling audits over a three-year period will be a means of reducing the burden! If the proposal becomes law, the compliance burden is not reduced at all; it is only the timing of the so-called burden that will be altered. Delaying two out of three audits to bundle them into one massive audit does not reduce the obligation to have all three financial years audited. Nor does this proposal reduce the compliance obligations imposed on a self-managed super fund.
Notwithstanding there will be eligibility criteria, and trustees do not have to opt-in to the three-year cycle, even if an SMSF is eligible, I simply fail to see how the federal government thinks the compliance obligations of the trustee are altered in any way, shape or form. Timing is the only variant here. So, let’s consider the implications of the proposed changes to SMSF audit rules.
When is an SMSF eligible to opt in to a three-year audit cycle?
The government proposal is that the eligibility of an SMSF to opt into the three-year cycle is to be self-assessed by the trustee of the SMSF. Such an approach is problematic on a number of levels.
Firstly, an SMSF has to have a good history of record-keeping, which is possibly limited to assessing whether the fund has met lodgement deadlines for annual returns. In practice, many SMSF trustees lodge their annual returns before they are permitted to, so as to ensure late lodgement penalties are not applied to the fund. The appearance of lodging on time does not necessarily equate to a good history of record-keeping.
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Secondly, if an SMSF has a trigger event at any time during the three-year cycle, they are required to catch up their fund audits before the lodgement of the annual return for the financial year in which a trigger event occurred. The determination of a trigger event is to be self-assessed by the SMSF trustee.
While many SMSF trustees are familiar with the SIS requirements, as they should be, the trigger event requirement may be problematic in situations where an SMSF trustee is unaware a trigger event has occurred, due to an inadvertent transaction within the fund, or the SMSF trustee’s lack of understanding of what the trigger event entails.
Another aspect of the proposed trigger event rules is the practical workflow consequences for the SMSF auditor. If an SMSF has elected to have the three-year audit, and a trigger event occurs in the second year, the proposed rules mean that the SMSF is required to have both year 1 and year 2 audited before the year 2 tax return can be lodged. Such a requirement places an unreasonable amount of pressure on the SMSF auditor to have available resources, and time, to undertake the audits, which were not expected to be received for review until year 4 of the cycle.
Who is really responsible for identifying trigger events?
Consideration must also be given to the proposed trigger events, and who is ultimately responsible for reviewing and identifying these trigger events. In reality, the accountant of the fund will most likely be the one responsible for the preliminary compliance review, when preparing the financial report and tax return for the fund. The additional time needed to review for trigger events, is time the accountant did not need to spend on any prior engagement with the fund, as this was the role of the SMSF auditor. The additional compliance review by the accountant will of course come at a cost to the SMSF, which is contrary to the proposal by the federal government that these measures will reduce the cost of the compliance for the trustee.
Audit fees will increase if the SMSF audit proposal becomes law
Among my colleagues, there is a general consensus that audit fees will in fact increase as a result of the proposed measure to introduce three-yearly audits. The belief that costs will increase is due to the reality that over the passage of time information is lost, and memories fade – yet the audit obligations and requirements for the SMSF audit do not. Missing documentation or incomplete details add to audit time, and hence increase audit costs.
Even for SMSFs where record-keeping is excellent, the audits will take approximately the same amount of time (given there are very few economies of scale that an auditor can achieve when undertaking multiple years at once). In addition, with the general CPI increases in hourly charge-out rates by SMSF auditors, fees will be stagnant at best and higher across the board generally. Coupled with the anticipated significant increases in compliance issues present in these bundled SMSF audits, and the consequential ATO reporting that auditors will be obligated to do, audit fees can only increase under these measures.
Further to this, where the SMSF auditor finds an issue that necessitates amended financials in year 1, this will result in additional time required by the accountant for year 1 (to amend the documentation and amend and re-lodge the year 1 tax return), and will have a knock-on effect to year 2 and year 3 where those financial reports (and tax return) would also require amendment as a result. The additional time for these services will far outweigh any minor savings the trustee may have enjoyed with a bundled audit.
The preliminary results of a recent survey into the impact of these proposed measures revealed only 6% of industry respondents anticipated a reduction in audit fees.
If the proposal proceeds, transitional arrangements are essential
The introduction of the proposed measures, if they do in fact go ahead, would need to be on a staggered basis to allow the SMSF audit industry to manage the workflow requirements of their practices. Auditors can not simply turn staffing on and off, and as a result, a staggered introduction should be introduced.
Make a submission, or join lobby group
Submissions in response to the discussion paper issued by Treasury, must be submitted by 31 August, 2018. If you are not able to draft your own submission, but feel these proposed measures are not appropriate, please feel free to contact me at firstname.lastname@example.org to join the lobby group that has been established to prepare a joint submission.
From a practical point of view, SMSF auditors in the industry consider the proposed measures add to the compliance burden of the trustees – even the well-behaved trustees. The introduction of the proposed measures can only result in greater costs for trustees – something the federal government was attempting to reduce.
The author of this article is Belinda Aisbett, CA, Bacc, SSA, SSAud. Belinda is a director of Super Sphere Pty Ltd, a specialist SMSF audit practice. She is a Chartered Accountant, a specialist audit member of the SMSF Association (SMSFA), a member of the SMSFA education and conference committees, and chairs the SMSFA’s auditors’ discussion group. Belinda is also a member of the ATO’s SMSF Auditor Professional Association Stakeholder Group.
The SMSF Auditors Lobby Group has been set up to present a collective voice regarding these proposed SMSF audit measures. Anyone interested in joining the SMSF Auditors Lobby Group can contact Belinda via email at: email@example.com.
For more information…
For more information on SMSF audits, see the following SuperGuide articles:
- SMSFs: 3 year audits policy will not benefit trustees and will add to complexity
- SMSFs: 3 year audits policy undermines integrity of the system
- Guide to SMSF audits
- Guide to the SMSF trustee declaration
- Guide to SMSF administration, reporting and record-keeping
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