Compliance audit of an SMSF

Requirements for conducting the compliance audit

As an approved self-managed super fund (SMSF) auditor, you must possess the required capabilities and competencies to conduct a compliance audit of an SMSF. This includes having full knowledge of the relevant legislation and its application to SMSFs.

You must conduct your compliance audit in accordance with the Standards on Assurance Engagements (ASAE)External Link produced by the Auditing and Assurance Standards Board.

The relevant ASAEs are outlined under Guidance Statement GS 009 Auditing Self-Managed Superannuation FundsExternal Link (PDF, 1.38 MB).

Based on your audit, you must be assured the trustees of the fund have met the requirements set out in super laws. When doing the compliance audit, you must:

• consider materiality and risk
• obtain sufficient and appropriate evidence on which to base your conclusions
• test identified contraventions against the Auditor/actuary contravention report (ACR) reporting criteria
• document your conclusions, opinions and judgments in writing to keep as part of your audit working papers
• include sufficient audit working papers to enable another auditor who has had no previous involvement with the audit to understand the work performed and the opinion reached
• report your professional opinion in the approved Self-managed superannuation fund independent auditor's report (IAR) form (NAT 11466)
• notify the trustee in writing and report to us in the ACR if you form the opinion that a contravention of a matter specified in the ACR may:
  • have occurred
  • be occurring, or
  • occur in the future.

SISA: compliance audit checks

The following sections provide guidance on the audit checks and evidence that would be needed to support your audit opinion in relation to the super laws listed in:

• the Self-managed superannuation fund independent auditor's report (IAR)
• tables 1A and 1B of the Auditor/actuary contravention report instructions.

This guidance does not replace or limit any professional obligations or standards that you are required to meet.

You must consider the circumstances of your client when planning an SMSF audit. In some circumstances, you will need to collect additional evidence and perform additional tests.

Section 17A: definition of an SMSF

Check if the fund meets the definition of an SMSF by collecting evidence and checking the:

• trust deed
• current number and names of members
• type of trustee
• relationship between members (for example, no member of the fund is an employee of another member, unless they are relatives)
• names of individual trustees or directors of corporate trustees
• details of legal personal representatives where relevant.

Further details about the definition of an SMSF can be found in SMSFR 2010/2 Self Managed Superannuation Funds: the scope and operation of subparagraph 17A(3)(b)(ii) of the Superannuation Industry (Supervision) Act 1993.

Section 35AE: accounting records

Check accounting records are:

• kept in Australia
• written in English or in a form that allows easy translation to English
• kept on file for at least 5 years (by sighting historical records or seeking written confirmation from the trustees).

Section 35B: accounts and statements

Check the accounts and statements (an operating statement and a statement of financial position) have been:

• signed by the required number of trustees or directors of the corporate trustee as indicated for each financial year below
  • 2020–21 and earlier financial years
    • corporate trustee with a single director – one director
    • corporate trustee with multiple directors – at least 2 of the directors
    • individual trustees – at least 2 of the trustees
  • 2021–22 and later financial years
    • corporate trustee with one or 2 directors – all of the directors
    • corporate trustee with 3 or more directors – at least half of the directors
    • individual trustees with 2 trustees – all the trustees
    • individual trustees with 3 or more trustees – at least half of the trustees
• kept for at least 5 years (by sighting historical records or seeking written confirmation from the trustees).

Section 35C(2): giving documents to auditors

Check the trustees have responded to your written requests for documents within 14 days and that you have kept a record of any:

• written requests to the trustees for documents relevant to the audit
• advice you sent to the trustees reminding them they must provide the requested documents within the required timeframe of 14 days and failure to do so is a reportable contravention.

Section 62: sole purpose test

Check the fund complied with the sole purpose test by confirming the:

• trust deed established the fund solely for the provision of benefits for fund members (upon their retirement or turning 65 years old) and their dependants (in the case of the member’s death before retirement)
• fund's activities and transactions were entered into with the sole purpose of providing benefits to members in retirement (or their dependants upon their death) and not to provide a present-day benefit before a condition of release has been met.

Make and document enquiries about the purpose of activities that have a risk of having a purpose that breaches the sole purpose test, such as:

• investments acquired, transactions or contracts entered into that provide
  • minimal or no returns for the fund
  • a current or additional personal benefit to members
• an active business run by the SMSF.

Further details about the sole purpose test can be found in SMSFR 2008/2 Self Managed Superannuation Funds: the application of the sole purpose test in section 62 of the Superannuation Industry (Supervision) Act 1993 to the provision of benefits other than retirement, employment termination or death benefits.

Section 65: loans or financial assistance to members

Check the fund has not lent money or provided financial assistance to members and relatives by:

• examining bank statements and seeking explanation from trustees for any unusual transactions, including transfers of money to members or relatives
• checking details of all loans by the fund (including parties to the loan, loan term, interest, repayments)
• checking any transactions with related parties for financial assistance to members or relatives
• reviewing asset ownership to ensure the investment is owned by the fund and that a charge or other form of security has not been taken over any of the SMSF’s assets to secure a member’s or relative’s personal borrowing

Further details about the prohibition of loans and financial assistance to members can be found in SMSFR 2008/1 Self Managed Superannuation Funds: giving financial assistance using the resources of an SMSF to a member or relative of a member that is prohibited for the purposes of paragraph 65(1)(b) of the Superannuation Industry (Supervision) Act 1993.

Section 66: acquisitions from related parties

Check whether the fund has acquired assets from related parties by:

• identifying the parties involved in fund acquisitions
• obtaining evidence of the parties to acquisitions, including sighting minutes of meetings regarding the purchase, invoices or contracts of sale.

If there is a related-party acquisition, check whether it is:

• an excepted acquisition
• acquired at market value.

Further details about the prohibition on acquisitions from related parties can be found in SMSFR 2010/1 Self Managed Superannuation Funds: the application of subsection 66(1) of the Superannuation Industry (Supervision) Act 1993 to the acquisition of an asset by an SMSF from a related party.

Section 67, 67A and 67B: borrowings

Check whether the fund has any borrowings by examining financial statements, documents and bank statements to check for overdrafts, loans or unusual contractual terms or transactions.

If there is a borrowing, obtain evidence (including loan documents) and perform testing to determine:

• the reason for the borrowing
• whether it is allowed under the borrowing exceptions
• whether the trust deed permits the fund to borrow.

If the fund has a limited recourse borrowing arrangement (LRBA) under section 67A, check the:

• asset is a type that can be acquired by the fund
• trust deed allows for LRBAs and the investment is in line with the fund's investment strategy
• loan documents ensure there is limited recourse available to the lender should the fund default on the borrowing
• deed of the holding trust (also known as the custody deed or the bare trust deed)
• express terms of any guarantee arrangements limit the rights of the guarantor to rights relating to the asset that is the subject of the arrangement.

If there is a replacement asset, check that it is allowed to be treated as an acquirable asset under section 67B.

Further details about borrowing restrictions for SMSFs can be found in:

• SMSFR 2009/2 Self Managed Superannuation Funds: the meaning of 'borrow money' or 'maintain an existing borrowing of money' for the purposes of section 67 of the Superannuation Industry (Supervision) Act 1993
• SMSFR 2012/1 Self Managed Superannuation Funds: limited recourse borrowing arrangements – application of key concepts.

Section 82, 83, 84 and 85: in-house assets

Check if the fund had at any time in the year, and the end of the previous year, related-party investments, loans or leases by sighting financial statements, bank statements and any other relevant supporting documents such as share and unit certificates, loan documents or lease documents.

If the SMSF invested in related parties, determine whether the investment meets the definition of an in-house asset, and whether any exceptions apply, by checking:

• the proportion of shares or units held in the related entity
• whether SMSF trustees or related parties hold a controlling interest or can sufficiently influence decisions of the entity (for example, directors, significant share or unit holding, casting votes or control over the day-to-day operations of the entity)
• the related entity's financial statements, including whether it has borrowed, its dealings are at arm's length, and distributions are paid as they fall due.

Calculate the market value ratio of the in-house assets at the end of the income year, the end of the previous income year and whenever an in-house asset was acquired during the income year.

Further information about in-house assets can be found in:

• SMSFR 2009/4 Self Managed Superannuation Funds: the meaning of 'asset', 'loan', 'investment in', 'lease' and 'lease arrangement' in the definition of an 'in-house asset' in the Superannuation Industry (Supervision) Act 1993
• SMSFR 2009/3 Self Managed Superannuation Funds: application of the Superannuation Industry (Supervision) Act 1993 to unpaid trust distributions payable to a Self Managed Superannuation Fund
• SMSFD 2008/1 Self Managed Superannuation Funds: how does the happening of an event in sub-regulation 13.22D(1) of the Superannuation Industry (Supervision) Regulations 1994 affect whether a self managed superannuation fund's investments in related companies or unit trusts are in-house assets of the fund
• SMSFD 2007/1 Self Managed Superannuation Funds: when is a dividend or trust distribution 'received' before the end of 30 June 2009 for the purposes of paragraph 71D(d) of the Superannuation Industry (Supervision) Act 1993.

Section 82: in-house assets – market value ratio

If the market value ratio exceeded 5% at the end of the previous income year:

• obtain evidence of a written plan to dispose of excess in-house assets by the end of the current year
• seek evidence that the written plan has been carried out.

Section 82 is breached if the trustees fail to make or carry out the section 82 written plan by the end of the year following the year in which the market value ratio exceeds 5%. Exceeding the market value ratio for the first time in the year being audited is not a breach of section 82 but:

• may be a breach of sections 83 and 84
• may lead to a breach of section 82 in the following year
• is a significant matter that should be communicated to the trustees.

Section 83: in-house assets – acquisition

Check any acquisitions by the fund (including the creation of loans and leases) to confirm whether the:

• acquisition was of an investment, loan or lease that was an in-house asset
• market value ratio of the fund exceeded 5% at the time of the acquisition
• acquisition caused the market value ratio to exceed 5%.

Section 84: in-house assets – take reasonable steps to comply

Check the trustees have taken all reasonable steps to comply with the in-house asset rules.

Where you have identified a breach of sections 82 or 83, you should consider whether the trustees had taken all reasonable steps to avoid the breach.

Trustee documents, including minutes of meetings, may contain further evidence about the acquisition and disposal of in-house assets.

Section 85: in-house assets – anti-avoidance

Check fund transactions (including transactions entered into through third parties) for schemes intended to circumvent the in-house asset rules by:

• sighting bank statements and other relevant supporting documents for transactions, including the methods for valuing assets
• considering the relationship between the fund and the parties to the transactions.

Section 103: record keeping – minutes

Check minutes of trustee meetings are retained on file for at least 10 years by:

• sighting meeting minutes and records of decisions relevant to the year under audit and retaining these on the audit file
• seeking written confirmation from trustees that these minutes and records are kept on file for at least 10 years.

Section 104: record keeping – change of trustees

Check the trustees keep and retain records for at least 10 years of all trustee consents to their appointment as a trustee of a superannuation entity or as a director of a corporate trustee of a superannuation entity and all changes of trustees, or directors of the corporate trustee, by:

• sighting records of trustee changes and consents relevant to the year under audit and retaining a copy of these on the audit file
• seeking written representations from trustees that these records are kept on file for at least 10 years.

Section 104A: record keeping – trustee declarations

Check that a trustee declaration has been signed and retained for 10 years for all trustees or directors appointed after 30 June 2007, or that have undertaken an education course to comply with an education direction, by:

• sighting a signed trustee declaration for each person that was required to sign one and retaining a copy of these on the audit file
• seeking written representations from trustees that the trustee declarations are kept on file for at least 10 years.

Section 105: record keeping – member or beneficiary reports

Check the fund has kept and retained all member or beneficiary reports for at least 10 years by:

• sighting any member or beneficiary reports relevant to the year under audit
• seeking a written representation from trustees that the reports are kept on file for at least 10 years.

Section 109: investments made and maintained on an arm's length basis

Check the fund's investments are made and maintained on an arm's length basis by examining:

• financial statements and source documents
• bank statements
• supporting documents of transactions, such as leases, loan documents or purchase contracts to check for commercial terms and a market rate of return.

Section 126K: disqualified persons

Check no trustee, or director of a corporate trustee, of an SMSF is a disqualified person by:

• seeking a written representation from each trustee or director that they are not a disqualified person
• searching:
  • our Disqualified Trustees RegisterExternal Link to see if an individual has previously been disqualified by us
  • the Australian Financial Security Authority Bankruptcy RegisterExternal Link for insolvency and bankruptcy information
  • the Australian Securities & Investment Commission (ASIC) Banned and disqualified registerExternal Link for individuals that are banned and disqualified from managing a corporation
  • ASIC's Published NoticesExternal Link for notices showing that a provisional liquidator or restructuring practitioner has been appointed to the fund's corporate trustee.  

SISR: compliance audit checks

Sub regulation 1.06(9A): pension payments

Obtain evidence that the fund has rules for pension payments as set out in SISR sub-regulation 1.06(9A) and that the fund complies with the rules (that is, payments are made at least annually and the minimum required payment has actually been paid to the member during the year) by examining:

• the trust deed
• bank statements for payments
• actuarial certificates, where relevant
• member records evidencing pension payments
• any amounts accrued as pension payments.

Regulation 4.09: investment strategy

Review the fund’s investment strategy for evidence the trustees have formulated and implemented an investment strategy that:

• considers the whole of the fund’s circumstances
• considers investment risk and returns, diversity, liquidity and the ability to discharge liabilities as they fall due
• considers the insurance needs of members
• is regularly reviewed.

Generally, the investment strategy is in writing. If there is no written investment strategy, obtain a written description of the investment strategy with sufficient detail to enable you to confirm compliance with regulation 4.09.

Evidence the investment strategy has been reviewed may be found in:

• an updated investment strategy
• notations on the current investment strategy
• information contained in minutes of trustee meetings.

Check the investments of the fund to confirm the trustees have implemented the investment strategy.

Regulation 4.09A: separation of assets

Check the fund's money and assets are held separately from money and assets held personally by the trustees or a standard employer-sponsor by:

• sighting asset ownership documents, including bank statements, to verify SMSF assets are held in the name of trustees on behalf of the fund (for example, R & J Smith as trustees for the Smith SMSF or R Smith Pty Ltd as trustee for the Smith SMSF)
• checking for alternative documentation that protects the fund’s assets (for example, a valid declaration of trust) where State law prevents ownership in the SMSF’s name
• reviewing transactions on bank statements to ensure fund money is not mixed with money belonging to related parties of the SMSF.

Where there has been a change in trustees, obtain evidence that ownership documents reflect the change.

Regulation 5.03: investment returns

Check the investment returns (including those from reserves) are allocated to each member's account in a fair and reasonable way by:

• checking details of the reserve account
• reviewing earning allocations to each member's account to determine if they are reasonable given the circumstances
• sighting the member records and accounts.

Further details about SMSF reserves can be found in SMSFRB 2018/1 The use of reserves by self-managed superannuation funds.

Regulation 5.08: minimum benefits

Check that minimum benefits have been maintained by:

• sighting member accounts and records that evidence pension or lump sum payments
• verifying any loans to members are genuine loans supported by appropriate documentation and transactions (e.g. regular repayments)
• checking whether members receiving payments have met a condition of release.

Regulation 6.17: restriction on payments

Check any payments were cashed, rolled over or allotted in accordance with the SISR rules by obtaining and evaluating evidence that the:

• payments were only paid to members who were eligible to receive those payments under the SISR and the fund's trust deed (based on age, cessation of employment, death, terminal medical condition, temporary or permanent incapacity, compassionate grounds, severe financial hardship, or transition-to-retirement)
• trustees have complied with the SuperStream rules in the SISR for rollovers to and from an SMSF from 1 October 2021, as a failure to comply is a contravention of regulation 6.17.

Further details about checking an SMSF's compliance with the SuperStream rules can be found in SuperStream SMSF rollovers and auditor reporting obligations.

Regulation 7.04: acceptance of contributions

Test the trustees were able to accept contributions by checking:

• the trust deed of the fund
• members’ ages and employment status
• the type and source of contributions (this could include downsizer contributions for members over the eligible age)
• timing and amount of contributions
• the member’s TFN was quoted to the trustee within 30 days of receiving the contribution if not already provided to the fund.

If a contribution was accepted that was inconsistent with the requirements of SISR regulation 7.04, check if the trustees have returned the amount to the entity or person who made the payment.

Regulation 8.02B: assets must be valued at market value

Check the trustees have valued all fund assets at market value when preparing the accounts and statements for the fund each income year.

Check the trustee's valuation of the fund's assets by:

• obtaining evidence from the trustees to confirm what method of valuation they used to value assets
• obtaining the supporting documentation that the trustees relied on when verifying market value of their fund's assets
• assessing whether the evidence that the trustees relied on is objective and supportable
• sighting third-party financial statements to verify that assets such as units in unit trusts, shares and loans are valued at market value, which includes checking that the entity is a going concern and that the assets are recoverable.

Further details about checking a fund's compliance with regulation 8.02B can be found at Valuation guidelines for self-managed superannuation funds and Verifying the market value of fund assets.

Regulation 13.12-13: recognition, encouragement or sanctioning of assignments and charges

Check and confirm the trustees have not recognised, encouraged or sanctioned an assignment of, or a charge over, a member’s super interest by seeking written confirmation from trustees.

If you become aware of any assignment of, or charge over, super interests, you must obtain relevant evidence.

Regulation 13.14: charges over assets

Check the trustees have not given a charge over or in relation to a fund asset by obtaining:

• written representations from the trustees
• property title searches for real properties
• searches of the Personal Property Securities RegisterExternal Link for interests registered by other parties against SMSF assets.

Regulation 13.18AA: collectables and personal use assets

Check the collectables and personal use asset rules have been met by sighting:

• insurance documents to check that assets were insured within 7 days of acquisition and insured in the fund's name
• written records of the decision for storage of collectable and personal use assets
• written evidence from the trustees that the asset is not used by, or leased to, a related party or stored in the private residence of a related party
• lease agreements for terms and conditions to determine if lessees are related parties of the SMSF.

If the collectable or personal use asset is sold to a related party, obtain evidence that the asset was transferred at market value as determined by an independent qualified valuer.