Is your SMSF auditor doing everything they should?

The auditor's responsibilities outlined.

Keep the external audit requirement in perspectiveEach year your self-managed superannuation fund (SMSF) has to be examined by an external auditor. From 1 July 2013, SMSF auditors need to have an SMSF Auditor Number, or SAN, which is issued by ASIC.

Each year you must formally appoint your auditor in your trustee minutes. The auditor has to be “independent”, which means they can’t be related to you or be a close business associate. Additionally, they should not have prepared your fund’s financial accounts.

The external audit requirement needs to be kept in perspective. As SMSFs are small entities, the law doesn’t demand – and will probably never demand – that the external audit function must be conducted continuously throughout a financial year.

The auditor’s responsibilities

Your SMSF auditor is not expected to be able to check your fund’s transactions from every possible angle. It’s up to your auditor to decide what needs to be looked at by assessing the risk your fund has from fraud or error.

The auditor also has to see if your accounting policies (such as how the fund will deal with income), and the presentation of the fund’s accounts, are appropriate for your super fund.

"Auditors have to be independent, meaning they can’t be related to you or be a close business associate."
Essentially, the auditor has two jobs: first, to confirm the accuracy of your SMSF’s financial records and second, to check that your fund complied with the super laws.

The first job is pretty stock standard for most accountants and hardly ever produces surprises. Preparing accounts for SMSFs isn’t difficult and most accountants can do this type of work in their sleep.

Checking a fund’s compliance with super laws, however, is more challenging and often a time-consuming job.

Once again, an auditor isn’t expected to look at every super law – this would be impossible and cost too much money – and determine if you’ve complied or breached them. There are, however, 29 laws and regulations your fund’s auditor is expected to look at, including the following:

The fund must meet the SMSF definition – all members must be trustees including, if relevant, directors of a corporate trustee – and there may be no other trustees or members, unless there is a specific exemption

  • The trustees need to have prepared appropriate financial records and kept those records for at least five years
  • All super fund assets need to have been kept separate from the personal and business assets of the fund members and their associated entities at all times
  • The fund must meet the sole-purpose test
  • The fund must not have loaned money to its members or their relatives, nor have acquired any prohibited assets from fund members or their relatives or business associates
  • The trustees must not have entered into any prohibited borrowing arrangement
  • If the fund has a Limited Recourse Borrowing Arrangement, then it must be structured correctly
  • The trustees cannot have leased any of the fund’s assets to fund members or their relatives or business associates – these are called in-house assets
  • The trustees cannot have invested the fund’s money into entities controlled by the members, their relatives or business associates – these are also called in-house assets
  • If the fund has any in-house assets, then it must fully satisfy any allowed exemptions, including the market value test (no more than 5 per cent of the fund’s total assets)

What your auditor needs to report

In some cases, when an auditor finds a particular breach they must report them to the Australian Taxation Office (ATO). Such breaches can include:
  • Failing the SMSF definition
  • New fund test – if your fund is less than 15 months old at the end of a financial year and you’ve breached any relevant super law by more than A$2000
  • A repeated breach of super laws – if you’ve previously breached a super law and make the same mistake again
  • Unfixed breaches – super law breaches from previous years that you haven’t fixed, or breaches that weren’t fixed in the timeframe you had committed to do so

In other cases, an auditor needs to work through a series of tests to determine if they should report super law breaches to the ATO. For example, if your breach of the super laws involves less than 5 per cent of the market value of your super fund, then that breach only needs to be reported to the ATO if it involves more than A$30,000.

What an auditor should do for you

If your auditor identifies that your super fund has breached the super laws, then they should give you the opportunity to fix the problem before it’s reported to the ATO. At the very least, you should have the opportunity to tell the auditor when it will be fixed so the auditor can pass this information onto the ATO when they report the breach.

There are a number of Administrative Appeal Tribunal cases involving super funds facing penalties because a breach has been reported to the ATO and no indication was provided as to when the trustees would rectify that breach. This type of reporting prompted the ATO to examine the fund in closer detail and, in turn, the funds faced heavy tax penalties.

It pays to maintain a healthy relationship with your auditor so that if you do make a mistake, they’ll come to you and ask you when it might be rectified.