Welcome
There were no conflicts declared for the meeting. Key messages from the December 2023 meeting were distributed to members and have been published on ato.gov.au
Marina Michaelides was welcomed as the new AuASB representative, replacing Matthew Zappulla. Members were advised that a new mailbox is being used for member engagement.
Action item updates
Action Item 02.24072023 – Assets acquired from a related party
The ATO has reviewed the compliance audit guidance current web content for auditors on conducting checks for whether a fund has made acquisitions from related parties and considers that the web content correctly reflects the appropriate expectations for auditors.
This action item is now closed.
Action Item 01.04122023 – Auditor Approach to Non-Arm’s Length General Expenses
The Treasury Laws Amendment (Support for Small Business and Charities and Other Measures) Bill 2023 has recently been passed in Parliament which allows certainty to progress this action item.
An out of session discussion with members will be scheduled to discuss options for possible guidance to be provided to auditors on non-arm's length expenditure (NALE) transactions (including issues of materiality, the application of section 109(1A) of the SISA and what are reasonable enquiries for an auditor to make).
The ATO noted that now law has passed, there are public guidance products being updated to help with guidance on NALE.
Action Item 02.04122023: Submissions for Independent Auditor Report (IAR)
Following member feedback, changes to the self-managed superannuation fund independent auditors report and the accompanying guidance on ato.gov.au have been published.
It is expected that the updated IAR is used for audits completed on or after 1 July 2024.
The updated IAR (docx, 682KB) is available for reference and an article will be published in SMSF News to bring the update to the attention of all auditors.
A member asked whether the ATO saw auditors changing the approved form wording and therefore changing the meaning of the reports. The ATO confirmed that it has not observed this as a regular practice being adopted by auditors.
This action item is now closed.
Action Item 03.04122023: SMSF annual return (SAR) reporting where the auditor is of the view that there is a material misstatement in the financial reports of the SMSF
The issue of Type 2 reports provided by service organisations and how they need to be considered for Part A qualifications was addressed as an agenda item at the Auditors Stakeholder Group meeting in August 2021.
The agenda item related to requests for a change in Part A qualifications in the SAR where an auditor applies Auditing Standard ASA 402 (Auditing Consideration Relating to an Entity Using a Service Organisation) and finds that after obtaining an unqualified Type 2 report, along with an the annual investor statement, they are still of the opinion that they do not have sufficient appropriate audit evidence in relation to material balances and transactions in the fund.
The key messages from the meeting included the following response:
- Auditors may be able to avoid a Part A qualification where sufficient appropriate evidence is obtained in accordance with ASA 402 and Guidance Statement GS009 Auditing Self-Managed Superannuation Funds (PDF 1.25MB)This link will download a file June 2020. It was therefore determined that the proposed change was not necessary.
- The ATO notes that the Joint Accounting Bodies (JAB) has subsequently issued guidance on ‘Audit considerations relating to an SMSF using an investment management service organisation’ in September 2023 to further assist SMSF auditors.
- The ATO considers that the previous response to this issue as well as the detailed guidance issued by the JAB appropriately addresses the expectations of auditors for when an audit qualification is required.
- Section A of the SAR requires a fund to report any audit qualifications and the ATO continues to maintain this expectation. In relation to this issue, the ATO has received feedback from members that some SMSF auditors may not be qualifying their audit reports in line with ATO expectations and as a result, may be leading to some funds incorrectly reporting to the ATO.
- The ATO will be undertaking broader communication to SMSF auditors and trustees on when Part A qualifications may be required for SMSFs using investment management service organisations.
Members raised questions in relation to Part A and Part B reporting with specific reference to market valuations and custodian reports. The ATO agreed to take this as an action item (01.02072024) to review reporting expectations before discussing further with members.
Action Item 04.04122023: Web content on section 82 of the SIS Act
Correspondence was sent to members on 7 February 2024 with the 2 main examples that have been raised with the ATO for clarification on how the in-house asset rules apply to the lease of a residential property by an SMSF to a related party:
- The lease is ongoing and continues beyond the end of the financial year.
- The lease is short term and ceases before the end of the financial year.
Feedback was sought from members asking if these scenarios provide the necessary clarification for how the legislation applies to the scenarios raised. Feedback confirmed the scenarios were appropriate but sought the following:
- a diagram, in the form of a timeline of the scenario leading into the treatment
- t provide guidance on how the section 82 obligations are resolved
- under scenario 2, would the ATO expect the auditor to lodge an auditor contravention report where a breach of section 82 from the prior year remains unrectified
- clearer articulation on whether an asset is only tested only at the end of the financial year to determine if it is an in-house asset.
The ATO will attempt to accommodate member feedback into the drafting of web content however, we note that guidance on rectification of SIS breaches is not usually provided in our web content.
Draft web content will be provided to members to allow more detailed feedback in the coming months.
ATO’s compliance and engagement program
The ATO tabled its SMSF auditor compliance and engagement report for the period December 2023 to May 2024. The report identified:
- a higher rate of referrals to Australian Securities and Investments Commission (ASIC) during the 23–2024 year in comparison to 22–2023
- a notable rate of registration cancellations by auditors post the commencement of ATO compliance action
- in-house audit reviews continue to be a major focus of compliance work
- during the period, compliance work was also undertaken to target auditors who have
- been involved in reciprocal audit arrangements
- have not undertaken any audits in the last 5 years
- are at risk of not holding appropriate PII and/or
- not completing completed the required CPD.
The main issues identified from compliance cases includes:
- inadequate evidence/testing of market valuations under regulation 8.02B
- insufficient testing of the existence, ownership, rights and obligations that the SMSF has for assets
- failure to check that trustee declarations have been signed and retained under regulation 104A
- lack of confirmation that transactions are conducted at arm’s length under section 109
- a failure to adequately check whether the fund has any borrowings per section 67.
A new review product has been deployed for treating high volume auditors. The purpose is to engage with auditors who audit more than 1,000 funds per year.
ASIC
ASIC investigations for SMSF auditors has resulted in 54 outcomes during the 23–2024 financial year.
There have been 14 disqualifications which are mainly related to audit quality issues and 25 cases resulting in auditors having conditions imposed on their registration. Of these, 15 are related to in-house audit breaches.
Auditing and Assurance Standards Board
The Auditing and Assurance Standards Board (AUASB) continue work on the projects on fraud, ASA 240 and growing concern. Other projects in progress include the sustainability project, audit evidence, risk response and internal controls.
An internal review of guidance statements is underway to consider relevance and determine if content is current.
Member comments
A member asked a question in relation to the application of the non-arm’s length income (NALI) rules in a scenario which involves an SMSF entering into a limited recourse borrowing arrangement (LRBA) with a related party for a low rate of interest. In the scenario, the fund complies with the terms of the LRBA, purchasing the commercial property, and deriving rental income from that property before refinancing with a third-party lender on arm’s length terms. The member asked whether the capital gain on the sale of the asset would be subject to NALI.
The ATO confirmed that example 4 in Law Companion Ruling LCR 2021/2 provides the relevant guidance on this issue.
In relation to any capital gain, paragraph 37 of LCR 2021/2 states – 'The non-arm’s length expenditure incurred under the LRBA will also result in any capital gain that might arise from a subsequent CGT event happening in relation to the property (such as disposal of the property) being NALI. This will be the case regardless of whether the LRBA is subsequently refinanced on arm’s length terms.'
Other business
The SMSF Auditors Professional Association Stakeholder Group Charter 24–2025 has been reviewed for the new financial year and a draft has been provided for member feedback. We will collate any feedback and finalise the Charter in settling the meeting’s key messages.
The ATO is introducing integrity declarations for all consultation stakeholder groups. Members will be provided with the integrity declaration which they need to sign to maintain their membership in the group.