A Self Managed Super Fund (SMSF) can have some big advantages over regular superannuation, and for people who really want to take control over their financial destiny, it is seen as the ideal choice. The benefits to running an SMSF are many, but if you were to narrow them down to a “top three”, you’d have to list these three reasons:
- Tax concessions – Earnings taxed at 15% and capital gains on investments at 10%.
- Estate planning benefits – Access to strategies with maximum asset protection and minimum tax liability.
- Investment flexibility – You decide what to invest in and how to allocate your assets.
That’s the good. But running an SMSF can have its downsides too. As a trustee, you’re solely responsible for the operation of the fund and must adhere to strict legislative guidelines. That means there will be legwork and paperwork that you will need to undertake, and the most onerous of these is an annual audit of your SMSF. There’s no getting around this one. It’s a regulatory requirement, and it’s critical that you get it right.
This article will look at what’s involved with such an audit, including who can perform it, when it must be done, the information that needs to be supplied, and what the possible outcomes may be.
The top view – what is required from an SMSF audit
Super funds are governed by the requirements of the Superannuation Industry (Supervision) Act 1993 (SISA) and the Superannuation Industry (Supervision) Regulations Act 1994 (SISR).
These both require that all super funds, regardless of their size or type, to be audited on an annual basis. This audit involves two parts:
- Financial audit – To examine the fund’s financial report to ensure it conforms to accepted accounting policies
- Compliance audit – To determine the trustee’s compliance with specific requirements of the SISA and SISR.
From this, the auditor provides an audit report using the ATO approved form. An SMSF audit report doesn’t need to be lodged with the SMSF’s annual return, so the timing of it can be more flexible according to how you’d like to operate, but the auditor is required to report any compliance breaches to the trustees and the ATO.
No, not everyone can conduct a SMSF audit
The Australian Securities and Investment Commission (ASIC) is responsible for the registration and management of approved SMSF auditors. It has the power to set competency standards and to cancel, suspend, or disqualify auditors where appropriate. Or to put it another way; whoever does audit your SMSF needs to be properly registered and in good standing with ASIC in order for you to meet your compliance requirements.
In order to be registered with ASIC, SMSF auditors must meet the minimum education, experience, and competency requirements, and carry adequate professional indemnity insurance. For your part, you don’t need to check to make sure that your auditor has these skills – ASIC will do so before accrediting them. You just need to make sure they’re accredited.
When it comes to actually choosing your SMSF auditor from the list of accredited ones in your area, you want someone who displays the following qualities:
- Independence – They shouldn’t hold any financial interest in the fund they are auditing or have close personal or business relationships with the members or trustees
- Security – They should have a secure electronic data transfer service for SMSFs to provide their required audit information
- Speed – They should use every means at their disposal to ensure each SMSF audit is completed on time
- Affordability – They should only bill time that they actually spent on auditing.
What do I need to provide to my auditor?
The trustees of an SMSF (i.e. you, and anyone that you’ve set up the SMSF with) are required to appoint an auditor at least 45 days before the auditor’s report is due, and they need to provide the auditor with an engagement letter that outlines their reporting responsibilities for the audit.
They must also supply the auditor with a letter of representation, which states that the trustees believe the financial statements to be a fair representation and that the SMSF complies with superannuation laws.
If you need any assistance with the preparation of these documents, be sure to contact Pinn Deavin, and we can provide further information, or answer any enquiries that you might have.
One the audit process has begun, the auditor will then require a variety of information from the trustees. It’s in your best interest to provide these in a timely and efficient manner in order to ensure that your auditor can complete their work on time. If you can get these pieces of information ready ahead of time and supply them proactively, so much the better. What you’ll need to provide can include (but might not be limited to):
- Written ATO confirmation that the SMSF is a regulated fund
- Details of trustees and company directors of the fund
- Copy of the SMSF’s investment strategy
- Trustee minutes for the year
- SMSF’s annual income tax return
- Contribution documents
- Year end financial statements
- Copy of accounting work papers and transaction reports
- Bank statements for the year
- Details and movements of term deposits, fixed interest securities etc
- Broker statements detailing share purchases and sales
- Dividend statements for shareholdings
- Unlisted unit or share certificates
- Details of property including titles, rates notices, rental agreements and building insurance
- Details of other assets including purchase and sale agreements
- Expenses including supporting reconciliations and schedules
- Evidence of pension payments (if applicable)
It seems like a lot, right? It doesn’t need to be an onerous process to bring all this together. As long as your SMSF is fastidious with its record keeping and archiving through the year all of this information will be relatively easy to collect together come audit time.
What the auditor does (once he or she has all your relevant information)
Based on this information, the auditor will then review the current trust deed to determine whether it was properly executed and complies with the SISA and SISR, and whether the SMSF has appropriately empowered trustees.
The compliance audit will look at a number of things, but will focus principally on two areas:
- Whether the fund meets the definition of an SMSF, has elected to be a regulated fund, and is maintained solely to provide benefits to members on their retirement
- Whether the trustees have a compliant investment strategy, are carrying out their administrative obligations, and are adhering to contribution and benefit payment standards.
What happens next?
When the audit is completed, the auditor should provide the trustees of the SMSF with a management letter, detailing the findings and implications of the audit. This should include:
- Details of any contraventions of the SISA and SISR
- Recommendations for courses of action by the trustees
- Any weaknesses in internal controls that could be improved
As well as providing a report to the trustees, the auditor is also obliged to report in writing to the ATO if the financial position of the SMSF is unsatisfactory or if a contravention of the SISA and SISR has occurred or may be about to occur. If the latter is the case, you will need to take further action, and likely engage with ASIC to determine the severity of the breach and the next steps that you’ll need to take.
Is all this expensive?
One of the real hot topics for people with SMSFs is the expense of the audit. Auditors are in competition with one another, so do compete on price, but even still these fees can range from around $500 for a very simple SMSF, all the way to in excess of $3,000, if the SMSF has had a lot of investment transactions or has made complicated investments – these, naturally, take more work for the auditor to go through.
Do I really have to manage all of this myself?
The short answer is, no.
A good accountant or financial planner – and surely if you’re setting up an SMSF, you’ve retained the services of one of these professionals – will understand the compliance and administrative obligations around these annual audits. They’ll also have all your records and the very nature of their work involves properly collating and archiving this material. So your accountant or financial planner will be well placed to outsource the work to, leaving you free to enjoy the flexibility and control that an SMSF provides.