SMSF Auditors Professional Association Stakeholder Group key messages 4 December 2023

Action items update

Action item 0107202 – SMSF Audits and use of service organisations

• The Joint Accounting Bodies released a facts and questions (FAQ) document (audit considerations relating to a self-managed superannuation fund (SMSF) using an investment management service organisation).
• This item was included for member discussion and feedback.
• Members did not have any additional feedback to provide in relation to the FAQs. This action item will be closed but feedback can be provided if members became aware of any relevant auditor issues.
• A member asked how independent auditor's report (IAR) qualifications needed to be reported to the ATO. This was captured as a new action item.

Action item 02072023 – Technical issue – Treatment of pink diamonds

• The ATO was asked if an SMSF investing in loose pink diamonds (naturally occurring, without any mounting/setting, though processed from a rough diamond) needs to meet the requirements of regulation 13.18AA of the Superannuation Industry (Supervision) Regulations 1994 (SISR).

The ATO responded no. Loose, natural pink diamonds are not subject to regulation 13.18AA of the SISR. In and of themselves, they do not fall within any of the paragraphs 62A(a) to (l) of the Superannuation Industry (Supervision) Act (SISA).

Even if loose, naturally-occurring pink diamonds are covered by paragraph 62A(m) of the SISA, since paragraph 62A(m) is not reflected in sub regulation 13.18AA(1) of the SISR, the requirements in that regulation will not apply.

The ATO is preparing a media article to outline the technical position.

Members suggested that the ATO consider whether the article could include reference to diamonds in general and other gemstones.

Action Item 03072023 – Insurance under Regulation 13.18AA

• The ATO was asked what the term ‘insured’ mean for the purposes of sub-regulation 13.18AA(5)(c) of the SISR?

‘Insured’ within sub-regulation 13.18AA(5) of the SISR refers to the state of having entered into a contract or undertaking in exchange for the protection of an asset from specified risks that could result in loss or damage to the asset.

The ordinary meaning of the term implies a standard of sufficiency of insurance, although the level of sufficiency is for the trustees to determine in line with the fund’s risk appetite balanced with the need to protect the members’ retirement income.

• The ATO was asked, in a situation where insufficient insurance is held by the SMSF for their assets, is this considered a breach of regulation 13.18AA of the SISR?

A SMSF that holds insufficient insurance over their assets could potentially be considered to be in breach of sub-regulation 13.18AA(5) of the SISR.

Even if a SMSF is not considered to have breached sub-regulation 13.18AA(5), there may be other relevant provisions which may need to be considered for the SMSF (for example, sole purpose test under section 62 of the SISA which requires that an SMSF is to be maintained for the purposes of the provision of benefits to the members).Action item 04072023 – Assets acquired from related parties

The ATO is still scoping the issues associated with this action and will be carried forward to the next SMSF Auditors Professional Association stakeholder meeting.

ATO

The ATO’s Compliance and Engagement Program update for the period July 2023 to November 2023 included:

• A media announcement in August identified the highest rate of auditor referral to Australian Securities and Investments Commission (ASIC) in 5 years (41 auditors referred during 2022–23).
• The compliance program in 2023–24 has seen a similar rate of referral with 13 auditors having been referred to ASIC at the end of October.
• Fourteen auditors have chosen to voluntarily de-register following the commencement of ATO compliance activity.
• The review of auditors who are at risk of undertaking ‘in house audits’ continues to be focus of our compliance program. Twenty-one compliance cases have been completed this financial year resulting in 7 auditors being referred to ASIC.
• Compliance action to address known reciprocal audit arrangements is ongoing with referrals to occur for this work in early 2024.
• Other compliance work expected to commence early in 2024 includes engagement with auditors who have not conducted audits in the last 5 years.

Auditor approach to non-arm’s length general expenses

A member raised the issue of the pending legislative changes for non-arm’s length expenditure (NALE) provisions and how this would impact upon the future evidentiary expectations of auditors.

In response, the ATO noted that:

• Practical Compliance Guideline PCG 2020/5 outlines that the ATO will not apply compliance resources to general non-arm’s length expenses for income years 2019–2023 inclusive. There is no intention to further extend the PCG coverage.
• As any proposed legislative changes have not passed, the ATO is limited in any guidance information which can be provided to auditors at this stage.

ASIC

ASIC noted it’s outcomes in the first quarter of financial year 24.

Per 23-275 media release, ASIC announces action against 11 SMSF auditorsExternal Link, between 1 July 2023 and 30 September 2023, ASIC:

• disqualified 3 SMSF auditors
• imposed additional conditions on 5 SMSF auditors
• cancelled the registration of 3 SMSF auditors.

Since 1 October 2023, further decisions have been made in relation to 11 in-house audit referrals mentioned earlier by the ATO. Of those, 6 have been finalised with 5 having had conditions imposed on their registrations and one which ASIC accepted their voluntary cancellation. These will be publicised in due course.

ASIC noted the Administrative Appeals Tribunal (AAT) delivered its decision to affirm the disqualification of an SMSF auditor, finding there is no doubt that the auditor was in breach of their independence requirements when they audited their spouse’s SMSF for 6 income years, AAT affirms ASIC decision to disqualify SMSF auditor for breaching independence requirementsExternal Link.

Charted Accountants Australia and New Zealand asked about ASIC’s ability to provide information about their cases directly to the professional associations prior to the decision being made rather than waiting for the public outcome. ASIC explained that while this may be legally available to it per section 127(4)(d) of the ASIC Act, it is considered on a case-by-case basis considering the procedural fairness and confidentiality issues arising within each case.

Auditing and Assurance Standards Board

The Auditing and Assurance Standards Board (AUASB) is continuing work on its Domestic and International agenda.

Domestically, this has focussed on Sustainability Assurance including the Exposure Draft (ED) ISSA 5000 submission to the IAASB, policy settings work with Treasury and analysis of the AASB ED’s ASRS1 ASRS 2 which outline the climate reporting requirements and what this may mean from the assurance perspective in Australia.

The AUASB will decide at its meeting on Wednesday 6 December as to whether the Less Complex Entity Standard issued by the IAASB should be adopted in Australia.

Internationally the AUASB is focusing on:

• The revised ISA 240 Fraud Standard (as an exposure draft) and the IAASB Strategic workplan which are to be approved at the December 2023 meeting.
• The ISA 500 Audit Evidence project is in the initial stages of proposed changes from feedback on submissions with specific changes to definitions and requirements being proposed at the December meeting.

The International Federation of Accountants (IFAC) recently issued a small business sustainability checklist which may be useful for clients of this industry group.

Independent auditors report

The ATO is considering updates to the independent auditor's report (IAR).

It is expected that the current reference to Auditing Standard ASQC 1:

• quality control for firms that perform audits and reviews of financial reports and other financial information, other assurance engagements and related services engagements

will be removed and updated with Auditing Standard ASQM 1:

• quality management for firms that perform audits or reviews of financial reports and other financial information, or other assurance or related services engagements.

Market valuations

Recent analysis of 2022 lodgment data has identified a population of funds that have holdings in asset classes where they have not reported a change in the asset values for several years.

The ATO is considering how to address this observed behaviour and will engage with the group in future meetings.

Other business

Media articles commenting on the application of section 82 of the SIS Act was discussed and that there would be value in the ATO considering web guidance on this matter.

A Member asked whether consideration could be given to amending the current ACR Reporting Criteria. In particular, the $30,000 reporting threshold under test 7. The ATO advised that as part of the ACR criteria review in December 2022 analysis showed:

• the $30k threshold was not creating an excessive amount of ACRs to be submitted under test 7 on its own
• a high percentage of ACRs being lodged because of test 7 were rated as ‘high risk’ by the ATO’s risk model
• the reported behaviour created visibility for what the ATO would term ‘risky’ behaviour that would not be known if not for that test.

The ATO considers it appropriate for the current test criteria to remain unchanged given we have seen a heightened state of risk around certain behaviours like illegal early access.

Attendees

Apologies