SMSF Compliance: What the Auditors look for
09 September 2013
Surviving the annual SMSF Audit.
The super laws require that the accounts, statements and compliance of an SMSF be audited each year by an approved auditor within the provisions of the:
• Superannuation Industry (Supervision) Act 1993 (SISA)
• Superannuation Industry (Supervision) Regulations 1994 (SISR).
It is important to be aware of the compliance issues before you operate a SMSF so that you do not contravene any of the requirements of running a compliant Fund. You should be aware of the requirements before you begin to transfer assets to or from your fund. It is not acceptable to say you were not aware as penalties could apply and things cannot always be easily undone.
As part of a thorough SMSF audit, an auditor should ask you the following questions and check the following documents as part of their compliance audit. This will also assist them in determining whether a contravention has occurred.
These questions are intended to assist the auditor to help them satisfy their reporting obligations to the regulator. These questions do not cover all the compliance provisions in a compliance audit.
The Self-managed superannuation fund independent auditor’s report (NAT 11466) outlines all the areas that should be covered in a compliance audit.
If you are aware of the requirements that an auditor will be looking for, then you should be able to avoid any nasty surprises at a time when you may have trouble putting things right or avoiding a penalty.
WHAT WILL BE CONSIDERED IN YOUR AUDIT LEGAL OBLIGATIONS
SISA section 17A (1) Does the fund meet the definition of an SMSF in accordance with the requirements of section 17A of the SISA? (2) Do the trustees want to become or remain an SMSF? (3) Determine whether the trustees want to become or remain a small APRA-regulated fund?
If yes, has the following occurred:
• confirm that the trustees have made an election to be regulated in accordance with SISA
• the trustee has appointed a registerable super entity (RSE) licensee as trustee, and, the auditor has:
––completed the fund’s audit
––issued an audit report in accordance with the APRA guidelines?
SISA section 126K
Disqualified trustees (4) Have the trustees provided a declaration or statement (usually contained within the trustee representation letter) that there is no reason that would prohibit them from acting as a trustee?
An individual is a disqualified person if any of the following applies – they:
• have been convicted of an offence involving dishonesty
• have been subject to a civil penalty order under the SISA
• are an undischarged bankrupt
• have been disqualified by a regulator.
SISA section 62 (5) Was the fund maintained for the sole purpose of providing benefits to any of the following:
• fund members upon their retirement
• fund members reaching the age prescribed
• dependants of fund members in the case of the member’s death before retirement?
SISA section 62
(6) Test whether the SMSF has contravened the sole purpose test by examining
• trust deed to ensure that the fund has been established and maintained solely for providing retirement benefits to members or their dependants in the case of a member’s death before retirement
• character and purpose of the fund’s investments to ensure that the
––investment arrangements do not provide prohibited financial assistance to another party
––trustees, or their family or friends, are not given access to fund assets for private use?
If the fund is running an active business as part of its investment strategy, this is an indicator the sole purpose test may have been contravened.
SISA section 65
Lending and providing financial assistance
(7) Did the trustees loan money or provide financial assistance to any member or relative of a member at any time during the financial year under review?
The trustees of a regulated super fund must not:
• lend money of the fund to a member or a relative of a member of the fund
• give any financial assistance using the resources of the fund to a member or a relative of a member of the fund.
SISA section 66
Acquisition of assets from a related party
(8) Did the trustees acquire any assets not listed as an exception under section 66 from any member or from a related party of the fund?
Trustees of regulated super funds must not intentionally acquire assets from related parties of the fund, subject to exceptions including:
• listed securities
• direct acquisition of business real property, or indirect acquisition through a related trust that meets the requirements of the regulations
• in-house assets up to the 5% limit.
All must be acquired at market value.
SISA section 67
(9) Did the trustees of the fund borrow any money or maintain an existing borrowing, other than as allowed by the specific borrowing exceptions under the legislation?
Borrowing exceptions include:
• to pay a beneficiary, limited to 10% of the value of the assets of the fund and not exceeding 90 days
• to cover super surcharge debts, limited to 10% of the value of the assets of the fund and not
• exceeding 90 days
• to meet the settlement of securities transactions, limited to 10% of the value of the assets of the fund and not exceeding seven days
• instalment warrant type arrangements that meet the borrowing conditions that became effective on 24 September 2007 (section 67 (4A)).
A borrowing involves receiving of a payment from someone in the context of a lender/borrower relationship on the basis that it will be repaid, and include a:
• loan, whether secured or unsecured
• bank overdraft
• transaction when the borrower and lender are the same legal entity.
An auditor should examine the fund’s creditors and accounting records to satisfy themselves that the trustees did not borrow or maintain any borrowings at any time during the financial year except for the purposes and under the conditions permitted.
SISA sections 82, 83, 84, 85
(10) The auditor should examine loans, investments and leases of the fund?
(11) Did the trustees comply with the in-house asset rules?
An in-house asset is an asset of the fund that is one of the following:
• a loan to, or an investment in, a related party of the fund
• an investment in a related trust of the fund
• an asset of the fund subject to a lease or lease arrangement between the trustee of the fund and a related party of the fund.
The trustees of a regulated super fund:
• must limit the total of in-house assets to a maximum of 5% of the market value of the fund’s total assets at year end
• are prohibited from making or acquiring an in-house asset that would cause the total of the in-house assets to exceed the 5% in-house asset ratio limit.
There are some limited exceptions to the in-house asset rules. Make sure you are familiar with the Part 8 in-house asset provisions.
(12) Did the total of the in-house assets exceed 5% of the market value of the fund’s total assets at year end?
(13) Did the trustees acquire an in-house asset that caused the total of in-house assets at the time of the acquisition to exceed the 5% in-house asset ratio limit?
SISA section 85
(14) Did the trustees intentionally enter into or carry out a scheme that had the effect of artificially reducing the market value ratio of the fund’s in-house assets?
SISA section 109
Investments on arm’s length basis
(15) Were all investment transactions made and maintained at arm’s length?
Investments by an SMSF must be made and maintained on a strict commercial basis:
• The purchase and sale price of assets should reflect a true market value.
• Income from assets held by the fund should reflect true market rate of return.
If transactions are not at arm’s length, section 109 is not contravened if the terms and conditions of the transaction are no more favourable to the other party than if they were dealing at arm’s length.
(16) The auditor should examine the purchase or sale of assets to check that:
• the purchase or selling price was at a fair market value
• money was actually paid?
This can usually be done by sighting valuation reports and bank statements.
(17) Auditors should examine lease arrangements to check that:
• formal lease agreements were drawn up
• investments were entered into and maintained on commercial terms
• lease payments were actually made in accordance with agreements
• appropriate collection action was taken if the terms were breached?
This is usually done by sighting lease agreements and bank statements, confirming commercial terms with the local property market and industry, and checking against industry standards.
(18) Auditors should examine loans to check that:
• there is a formal contract and repayment schedule
• the loan conditions are on commercial terms, including the period of loan, repayments, security
• and interest rates
• repayments have been made?
This is usually done by sighting formal contracts, repayment schedules and bank statements, and by checking market rates.
(19 )Auditors should examine investments in entities to check:
• all transactions were carried out at market value
• commercial rates of return were achieved
• the return on investments was paid or received – for example, trust distributions or dividends?
This is usually done by sighting bank statements and checking market rates.
SISA paragraph 52(2)(d)
Separation of assets
(20) Are the assets of the SMSF separate from any assets held by the trustee personally or by the employer sponsor?
(21) If state law prevents the asset from being held in the fund’s name, is there other documentary evidence that clearly identifies fund ownership of the asset or is a caveat, instrument or declaration of trust in place?
(22) The auditor should satisfy themselves that all assets are held either in the name of the fund or in the name of the trustees as trustee for the fund?
The SMSF trustees must keep the money and other assets of the fund separate from their personal assets held by employers who contribute to the fund.
SISR Regulation 7.04
(23) Did the employer make a contribution?
(24) Were these contributions made in accordance with the conditions set down within Part 7 of the SISR?
(25) Were all employer contributions correctly declared for income tax purposes?
The rules on acceptance of contributions depend on whether contributions are mandated employer contributions, which include:
• super guarantee contributions
• super guarantee charge
• award-related contributions.
The trustees of a regulated super fund may accept mandated employer contributions for a person regardless of the age of the person or the number of hours they are working at the time.
The rules on accepting non-mandated employer contributions vary according to:
• the person’s employment status
• the person’s age
• the person’s health
• whether the contributions are eligible spouse contributions.
SISR Regulation 7.04
(26) Did the fund receive any contributions from members?
An auditor should verify that these contributions were in accordance with the applicable rules for the financial year being audited. These relate to the caps, quotation of tax file numbers (TFNs) and age-based employment status.
For more information about this issue, refer to our website at www.ato.gov.au/smsf
Member contributions made by or on behalf of a member other than employer contributions made for the member.
If the fund accepted member contributions for a member when their TFN has not been quoted (for super purposes) the fund should return the amount to the individual or entity that made the contribution within 30 days of becoming aware that they had received it and not held the member’s TFN.
(27) Did the fund receive the member’s TFN (for super purposes) within 30 days of receiving the member contribution?
If not, did they return the contribution?
SISR Regulation 5.08 and 6.17
(28) Did the trustees pay any benefits to members during the financial year under review?
(29) Was the payment made in accordance with Part 6 of the SISR and permitted by the trust deed?
(30) Did the fund pay a pension during the financial year?
(31) Did the trust deed permit the payment of a pension and did the trustees meet all of the administrative requirements for the payment of pensions?
The administrative requirements for the payment of pensions may include obtaining an actuarial certificate, registering for pay as you go (PAYG), withholding correct amounts of tax from pension payments and remitting these to us, and issuing an end of year payment summary.
(32) Have minimum pension benefit payment standards been met?
A fund trustee is no longer required to cash the benefits of a member simply because they have reached a certain age.
(33) Have members’ minimum benefits in the fund (as defined) been maintained in the fund until the benefits are cashed, rolled over or transferred as benefits of the member?
An auditor will ensure member benefits are correct by reviewing the member statement.
SISR Regulation 13.18AA
(34) Did the fund hold an investment in a collectable or personal use asset that was not maintained in accordance with the prescribed rules?
If these assets were held before July 2011, trustees have until 1 July 2016 to comply with the new rules associated with holding, storing and insuring these assets.
SISA section 103
Duty to keep minutes and records
(35) Did the trustees keep minutes of all meetings and maintain the minutes either:
• for a minimum of 10 years
• since the establishment of the fund, if the fund has been established less than 10 years?
SISA section 35A
(36) Did the trustees keep and maintain accounting records either:
• for a minimum of five years, or
• since the establishment of the fund, if the fund has been established less than five years?
SISA section 104A
(37) Have those trustees who became a trustee after 1 July 2007, signed and maintained a trustee declaration?
SISA section 35B
Accounts and statements
(38) Did the trustees prepare and maintain proper accounting records, and prepare a statement of financial position and an operating statement, in accordance with accepted Australian accounting principles and practices?
SISA section 35C
Audit of accounts and statements
(39) Did the trustees provide the necessary documents to complete the audit in a professional and timely manner?
SISA section 52 (2) (e)
Enter into a contract
(40) Did the trustees enter into a contract, or do anything else that would hinder the trustee from properly performing or exercising the functions or powers of a trustee?
SISR Regulation 4.09
(41) Did the trustees have an investment strategy for the fund?
(42) Did the investment strategy give consideration to all of the following:
(43) Are the fund’s investments in line with the investment strategy?
SISR Regulation 13.12
(44) Did the trustees recognise, or in any way encourage or sanction, an assignment of a super interest of a member of beneficiary?
SISR Regulation 13.13
(45) Did the trustees recognise, or in any way encourage or sanction, a charge over or in relation to a member’s benefits?
SISR Regulation 13.14
(46) Did the trustees give a charge over, or in relation to, an asset of the fund?
FINALISING YOUR AUDIT
An auditor should use the following documents and papers as part of their work files:
• copy of trust deed
• appointment of trustees
• election or notice to be a regulated fund
• The auditors current audit engagement letter
• trustee representation letter
• financial report of fund
• working papers, including copies of all relevant documents that are important in providing evidence that support the auditors findings and opinion
• management letter or completed audit finalisation report completed audit report.
While Personal Super Investor tries to ensure the quality and reliability of this information, however Personal Super Investor does not accept any responsibility for the accuracy, completeness or currency of the material included in this article or on this website, and will not be liable for any loss or damage arising out of any use of, or reliance on, the information published on our web site. You always should check your own personal circumstances with your accountant or the Australian Tax Office (ATO) when it comes to making any expenditure, investment, structural or tax related decisions.
Source: ATO Nat 11375-01-2013 Guide for SMSF Auditors