Annual SMSF Audit - Why Quality Counts
Financial security and independence are two of the most popular reasons that Australians are turning towards SMSFs in their droves. There is no doubt that managing your super fund is as appealing as it sounds for those dedicated to spending their retirement in affluence.
While freedom is key, there is one area that an SMSF owner must relinquish control and that is the dreaded annual audit. We use the word dreaded because it's no secret that stereotypes of dull auditors with their lengthy, drawn out stories and inside (cue not funny) jokes are rife within the industry.
ATO crack down on illegal SMSF tax schemes
The ATO has encouraged self-managed retirees to expose dodgy SMSF practitioners that are pushing illegal tax schemes and giving the industry a poor reputation. After identifying a significant number of retirement planning schemes that were created purely to help people avoid tax as opposed to providing retirement benefits, the ATO is looking to close down the schemes with the help of SMSF retirees.
The Deputy Commissioner Michael Cranston has joined forces with trustees who have fallen victim in the rogue schemes in an effort to work together to shut down dodgy schemes and put an end to schemes that pose a risk for retirees and their retirement savings.
ATO Report Released - Top Contravention Areas for SMSF
The ATO has released valuable data that outlines where the highest proportion of contraventions occurred in the previous financial year and how many have since been rectified.
The review has shown that 7,900 SMSF's had auditor contravention reports lodged with a total of 20,500 contraventions.
The report shows there has been a decrease compared to the previous year of 4% in the number of SMSFs with an ACR and a decrease of contraventions by around 7%. Just under half of those contraventions reported to June 2016 were reported as rectified.
ATO Targeting Low-Cost SMSF Auditors
The ATO is beginning to target low-cost self managed super fund auditors in an effort to ensure audits are undertaken thoroughly and efficiently.
Low-cost auditors require a high turnover of work to make ends meet which is leading the ATO to examine whether the individuals are examining contraventions closely enough.
Crack down on auditor independence by ATO for 2016/17 FY
The ATO has been clear that risks to independence are a focus in the 2016-2017 financial year, as is the assurance that SMSF auditors are complying with all of the independence requirements set out by the APES Code of Ethics for Professional Accountants.
Here are a number of key threats to auditor independence which are being focused on by the ATO in the current financial year:
Self reviews This is the threat of an SMSF auditor who also acts as a tax agent for the fund. Self-reviews are a threat to independence and auditors are required to safeguard independence and remove themselves when they are concerned about compliance.
Reciprocal audits The process where an auditor will audit their auditor’s fund. This process can lead to self-interest threats and creates a disincentive to question the other practitioner’s work. ASIC and the ATO have an issue with reciprocal audits and require a third party that is independent to undertake an objective audit.
Misuse of SMSF auditor numbers surfacing via ATO
A number of auditors have approached the ATO with serious concerns their auditor numbers are being misused on SMSF annual returns they were not responsible for.
This startling revelation has been revealed as the ATO admits there is nervousness from within the SMSF auditing community that misuse is being detected due to administrative error but also misappropriation of auditor’s numbers.
In an act to monitor the misuse, SMSF auditors can email the ATO directly to be sent a list of the annual returns on which their numbers have been recorded allowing a more stringent monitoring of SMSF number use. Due to privacy reasons, this list cannot be sent automatically to auditors and should be manually requested by each SMSF auditor.
New SMSF returns are due 28th February.
As most of the industry will be aware, the annual return for new SMSFs is due on the 28th February 2017. If you’re in the process of arranging an annual return for a new SMSF, there are plenty of things to keep in mind.
Considerations such as whether the SMSF needs to lodge, any establishment costs and the status of the fund should be reviewed ahead of this deadline.
How do you know whether you need to do an annual return for a new SMSF?
Due to the fact that SMSFs are a type of trust and deposits of cash are made into a super fund bank account, a new SMSF will require financial statements and tax returns regardless of the size of the fund.
All SMSFs need their financial statements audited annually by a registered super fund auditor for compliance and with the 28th February deadline looming it’s important that any new fund gets their return organised to ensure no red flags are raised.
SMSF changes imminent for collectables
SMSF's that hold collectables or personal use assets including paintings, coins, antiques, artifacts, memorabilia, recreational boats, jewellery, books, wine or motor vehicles acquired before 30 June 2011, should be aware of significant changes that will take effect on 1 July 2016.
A new set of rules will be rolled out for SMSF’s and investors should be aware of the rules to protect their investment and ensure their collectables have the appropriate level of documentation, insurance and legal support.
Collectables are a great way for individuals to invest ahead of retirement and while they don’t provide immediate benefit, they are an attractive investment for self-managed super funds.
SMSF compliance - balancing automation with price pressures
Managing compliance requirements with the rise of automation and price pressures can be a serious balancing act for SMSF auditors.
As auditors experience the pressure to reduce their audit fees to meet with a competitive market, there is an increased pressure from the ATO and the Australian Auditing Standards to maintain the same high level of integrity and quality. This pressure is a challenge for auditors who are already under pressure to master & comply with new technologies. SMSF accountants and administrators are embracing the cloud-based technology integration of electronic data feeds, which provides more efficient ways to gather and share real-time data. These real-time feeds provide valuable information about fund information as it happens.
Vice is tightening on SMSF auditors
With ASIC having an online register of all registered SMSF auditors as well as a list of those suspended, pressure is on for auditors within the industry to make sure all superannuation laws, regulations and codes of practice are carried out precisely.
ATO is currently working with the Tax Practitioners’ Board (TPB) and ASIC to establish clear boundaries and are looking at the various threats to independence as outlined below.
Reporting an irregularity within a company fund, especially if this is an auditor’s only or largest client puts the auditor in an invidious position – by obeying the law he could also be putting himself out of work. The same dilemma is placed on an auditor who obtains referrals from a large client. Reporting an irregularity in that client’s fund is likely to cause the cash cow of referrals to dry up. Close personal relationships with the trustees, the accounting team or members of the fund being audited calls independence into question, particularly if it is a family or business relationship. This also holds true for staff who have left a company to begin their own practice then go back to perform an auditing function - reporting former colleagues just doesn’t seem “cricket”.
The Federal Budget in May 2018 included a proposal that would allow more time for Australians aged 65 to 74 to boost their retirement savings, by introducing an exemption from the superannuation work test if specific circumstances apply.This exemption will apply where an individual’s total superannuation balance is below $300,000 and will permit voluntary superannuation contributions in the first year that they do not meet the work test requirements. This will come into effect from 1 July 2019.We thought it would be useful to run through what it takes to meet the work test with some examples.
The Basic RuleIf you are aged between 65 and 74 you must satisfy the work test prior to your fund accepting contributions. You must have worked at least 40 hours within 30 consecutive days in a financial year before your fund can accept contributions for you. So, if you work 10 hours per week in any 30 day period or 10 hours over four days, that would be sufficient.Work in this context means gainful employment. The Superannuation Industry (Supervision) Regulations 1994 - Reg 1.03 defines "gainfully employed" means employed or self-employed for gain or reward in any business, trade, profession, vocation, calling, occupation or employment.There are two elements here, you must be employed or self-employed and there must be an objective of receiving gain or reward. Let look at some examples.
Passive IncomePassive investment income (such as the receipt of rent, trust distributions or dividends) is not a direct result of actions or exertion in a particular task. A person who only receives passive income would fail to meet the work test.There have been cases where share traders & gamblers have argued that their activity is a business so would qualify as gainful employment, the ATO would tend to disagree.
Gain or RewardThere is no minimum or monetary value for the gain or reward but there needs to be a correlation between the work done and the 'reward.' There must be an objective to receive a payment. Previous case law has shown work test can be satisfied provided there is a profit-making objective and a realistic expectation of reward, even if that reward is not received in the same year the work is undertaken.Unpaid or charity work as a volunteer does not meet the definition of gainful employment as there is no reward.
Working for Family or FriendsThe Superannuation Guarantee (Administration) Act 1992 states “A person who is paid to do work wholly or principally of a domestic or private nature for not more than 30 hours per week is not regarded as an employee in relation to that work.” If a member is paid for babysitting or gardening, the circumstances surrounding the arrangement will be critical. For example, if grandchildren are looked after while their parents are on holiday, the motive for doing so would likely be for personal or domestic reasons rather than to derive financial gain. In this case, the definition of gainful employment may not be satisfied.If in doubt about the work test, a private ruling should be sought from the ATO.Please note - the above article is general in nature, it was written without taking into account any individual contractor’s situation or needs, and is not intended as professional advice.