How would a three-year audit cycle impact the SMSF industry?

In the 2018 Federal Budget Announcement earlier this year, the Federal Government revealed plans to change the SMSF audit cycle in a bid to reduce the red tape and compliance burden for SMSF trustees where suitable. 

The proposal received a mixed reception, with many SMSF audit firms being blindsided by the announcement, and industry leaders warning of the possibility of the closures of many businesses and the departure of many skilled professionals from the industry as a result. 

What is the Federal Government proposing? 

The objective of the measure is to incentivise good record-keeping and compliance by SMSFs whilst maintaining system oversight and integrity.

The annual audit requirement would change to a three-yearly requirement from 1 July 2019 for SMSFs with a history of good record-keeping and compliance.

Under this measure, audits conducted for SMSFs on a three-yearly audit cycle will cover all of the three preceding years, maintaining integrity within the SMSF sector. SMSFs that do not meet the eligibility criteria will not be eligible for a three-yearly audit cycle and will continue to be annually audited.

Which Trustees would be eligible?

Earlier this month the Treasury released proposed eligibility criteria, based on two factors:

  1. Good record keeping and compliance: SMSFs will have to meet eligibility criteria of timely submission of SMSF annual return (SAR) and three consecutive years of clear audit reports to move from an annual audit cycle to a three-yearly audit cycle; and
  2. Key events: SMSF on a three-yearly audit cycle will be audited in every year in which a key event occurs, with such audits covering all years since the previous audit.

The paper also stated that eligibility for a three-yearly audit will be based on self-assessment by SMSF trustees:

“However, if the ATO becomes aware that an SMSF trustee has:

  • incorrectly assessed their eligibility for a three-yearly audit cycle
  • failed to submit an SMSF annual return (SAR) in a timely manner
  • or, has failed to procure an audit in a year of a key event,

the ATO will notify the trustee that an audit is required and consider further action if necessary”.

What are the key requirements under the new audit cycle? 

SMSFs that move to a three-yearly audit cycle will be required to continue to submit the fund’s SARs in a timely manner to remain on a three-yearly cycle. SMSF that has submitted the fund’s SAR in a timely manner could range from:

  • An SMSF that has never submitted a late SAR; to
  • An SMSF that has not submitted a late SAR in the last three years; to
  • An SMSF without any outstanding SARs.

The proposal also outlines that after the occurrence of a key event, if the audit does not result in an ACR, the SMSF may continue to be eligible for a three-yearly audit cycle. This means that as long as no other key events occur in the next three years and the SMSF continues to meet good record keeping criteria, the SMSF will next require an audit three years after the ‘key event’ audit.

Possible key events include:

  • The commencement of a superannuation income stream by a member for the first time;
  • the death of a member;
  • the addition or removal of a member;
  • receipt of non-arm’s length income (NALI);
  • commencement or maintenance of a limited recourse borrowing arrangement (LRBA);
  • acquisition of an asset from a related party;
  • investments, loans or leases with a related party; or
  • in-species lump sum payments to a member.

Caution: One of the most common breaches we find are funds not paying the minimum pension. This would not be considered a key event. If such a breach was left for two years, the fund would have to pay back taxes of many thousands. This would have been minimised or possibly avoided from an annual audit.

What is the likely impact on the SMSF industry? 

Given the complexity of the measures highlighted above, what can be guaranteed is that accountants and administrators will be flooded with calls from their clients wanting to know if they are eligible for the audits to occur every three years and whether it’s a good idea.

The proposal will place a greater onus on tax agents to identify issues in their funds. Tax agents will need to have in place robust document processes to ensure three years’ worth of records are readily available to the auditor.

Just imagine if the trustee of the SMSF change their accountants within the three-year period, how easy would it be to obtain this information from the previous accountant? Does the three-year audit cycle reduce the compliance work in this case? With a three-year audit cycle an error could remain undetected for longer and resolving three years of mistakes could become more time consuming and expensive to rectify. It will potentially increase costs for trustees as accountants and auditors will be required to undertake more work.

There remains strong support in the industry for this change, however, the SMSF Association is yet to make their position clear. CEO John Maroney was recently quoted saying, "the proposal was a fitting reward for SMSF trustees that adhere to the rules and will cut red tape for the sector. But it is still the position of the Association that an independent audit is essential to the integrity of SMSFs."

Have your say!

Submissions to the discussion paper are requested from the SMSF industry, up until 31 August 2018. 

If this article has raised questions for you, contact us today.

This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information.