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Suddenly there is a great deal of chatter around town about the impending arrival of trustee penalties on 1 July 2014. Auditors, it seems, are about to become all powerful. How can advisers, accountants and trustees have confidence that auditors will have a perfect strike rate for uncovering and reporting breaches?
The Federal Government has forecast that it hopes to make well over $100m in the coming financial year by imposing penalties on SMSF trustees.
Let's start by making sure we all know exactly what's coming on 1 July 2014. Have a look at the Tax and Superannuation Laws Amendment Bill 2014 for a complete guide to the rectification and education directions and the administrative penalties that the ATO will have at its use from 1 July 2014.
Please note: a penalty unit is currently $170 unless it is for an infringement that occurred before 28 December 2012, in which case it is $110. And remember that the penalties will be applied to breaches that occur before the start date but have not been rectified.
To save you cross-referencing the SIS Act, 1993 with Schedule 2 of the proposed Act yourself, we've devised the following table to help you identify what the penalties apply to and how much each breach could leave trustees out of pocket:
Administrative penalties to be applied to SMSFs from 1 July 2014
|
SIS Act Provision |
Detail |
Penalty units |
$ value | |
Subsection 34(1) |
Each trustee must ensure prescribed standards applicable to the operation of the fund are complied with at all times |
20 |
$3400 | |
Sec 35B |
Each trustee in respect of year of income must (unless excepted) ensure following accounts and statements are prepared: financial position, operating statement, etc |
10 |
$1700 | |
Subsection 65(1) |
Trustees must not lend money to a member of fund, a relative of a fund member or give other financial assistance etc |
60 |
$10,200 | |
Subsection 67(1) |
Trustees must not borrow money or maintain an existing borrowing except a limited recourse borrowing under Sec 67A |
60 |
$10,200 | |
Subsection 84(1) |
In house asset rules must be complied with |
60 |
$10,200 | |
Subsection 103(1) |
Duty to keep minutes and records |
10 |
$1700 | |
Subsection 103(2) |
Duty to keep records if there is only one trustee |
10 |
$1700 | |
Subsection 103(2A) |
Must retain for at least 10 years an election ... |
10 |
$1700 | |
Subsection 104(1) |
Duty to keep records of changes of trustees |
10 |
$1700 | |
Subsection 104A(2) |
Appointed trustees must sign declaration that he/she understands duties |
10 |
$1700 | |
Subsection 105(1) |
Duty to keep reports |
10 |
$1700 | |
Subsection 106(1) |
Duty to inform regulator of significant adverse events |
60 |
$10,200 | |
Subsection 106A(1) |
Duty to notify Commissioner of Taxation of change of status of fund |
20 |
$3400 | |
Subsection 124(1) |
Investment managers must be appointed in writing |
5 |
$850 | |
Subsection 254(1) |
Information to be given to the regulator |
5 |
$850 | |
Subsection 347A(5) |
Obligation of participants in the Regulator's statistics program |
5 |
$850 |
 This table makes it immediately apparent that the gaze of the ATO is firmly on those areas long perceived to be problematic within the SMSF sector: related party loans, borrowings, in-house assets and duty to inform regulator of significant adverse events.
The introduction of these penalties should come as no surprise to anyone involved in the SMSF sector. In the lead up to 1st July 2014, the focus of every SMSF practitioner needs to be whether or not their trustees have their affairs in order and whether or not their auditors are using systems that work in the best interests of the SMSF client, whilst complying fully with the letter of the law.
Our goal, as professionals, should be to prove the ATO wrong about the level of breaches in the industry. This is a wonderful opportunity for trustees, their advisers and accountants to prove we take the audit process seriously and we are up to the job of ensuring trustees run fully compliant funds on an ongoing basis.
So how are we going to achieve that objective? A good starting point is to re-assess your relationship with any SMSF auditor you have been relying on up until now. Ask yourself, seriously, whether they are up to the job.
Do SMSF Auditors know how to audit?
According to the ATO there are just over 7,000 approved SMSF auditors registered with ASIC. Obviously you need to make sure you are dealing with one of them. The next question to address is whether they have any conflicts of interest and whether they are really SMSF audit experts.
However, according to the ATO, over 6000 are also tax agents, with potential independence risks and over 3000 of them still audit less than 20 SMSFs per year. And it your fund is unfortunate to be one of 20 funds audits, it is quite likely that either the fund may not be audited professionally or the auditor will lodge a contravention report when he is not really required to do so.
Accountants, advisers and trustees need to put their auditors under the microscope about those two issues in particular: how do they manage potential conflicts of interest and how familiar are they with the regulatory requirements governing SMSF audits. And it is evident that 300 of them are not as they were recently reported to ASIC by ATO.
There are three things which will determine the SMSF Audit industry's future
1) Independance - Cases where independance is threatened :
a) Partner of the accountant conducting an audit without addressing the threats to independance as outlined in the updated APES 110;
b) Accountants auditing funds for each other - A accountant audits funds of B accountant and B audits funds of A;
c) Auditors are appointed by accountants and administrators instead of trustees.
2) Shocking knowledge base : Most SMSF auditors got registered due to grandfathering rules as on 1st January 2013, which meant that if you were an auditor and had completed an audit subject in your universtity degree (some had some 20 years back) and had audited 20 funds in the previous 12 months, you automatically become eligible to be an approved auditor. Hence most SMSF auditors, almost 95% have not passed any exam in SMSF audit. The sad part is that there is no course available for this special skill other than one day workshops offered by various professional bodies.
3) Lack of any formal audit program. Although the tax office has supplied a compliance checklist and the auditing standard GS 009 offers a basic checklist, there is no industry standard checklist available.
Independance in SMSF Audit
If you have a combined accounting and auditing service, you will need to prove that you are able to manage any conflicts. The easiest way to achieve this is to move away from traditional, labour-intensive audit methods and embrace the latest technology in SMSF auditing.
We cannot control the fradulant independance activities, however have a solution to the other two problems, that is the knowledge base and an auditing checklist which will ensure that each audit is top class. Due to the innovative case ware method of picking 610 questionaire, the auditor tailors each checklist as per the fund's requirement.
We have spent almost two and a half years developing Australia's first auditing tool, www. technology that can resolve all of the above issues, including independance analysis: volume of funds that can be audited in any one year, internal conflicts of interest and, topically, detection and management of potential and real breaches.onlinesmsfaudit.com.au
We believe our system can deal with the major issues facing SMSF practitioners right now: cost-effective service delivery to an expanding client base, management of internal conflicts and, above all, compliance. the new administrative penalties.
Our system takes the auditor, audit staff, accountant and trustee through several steps BEFORE a possible breach is anywhere near being sent off to the ATO. This enables all parties to examine, review and/or gather any required evidence to prove that a potential breach has not occurred. We believe our system takes human error out of the audit process, thereby reducing the potential for non-breaches to end up in the lap of the ATO.
Auditors are currently contemplating increasing their professional indemnity insurance to deal with possible reporting errors that could leave SMSF trustees significantly out of pocket. And remember, this is personal, trustees have to pay the penalties themselves, not out of their SMSFs!
We think our web-based, automated SMSF audit system provides better, and a more affordable, solution. Check out https://onlinesmsfaudit.com.au/HowItWorks.aspx and if you are a trustee and your auditor is not aware of it, please send them a link to this service.
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