If you operate a Self-Managed Superannuation Fund (SMSF), you’ll know that there’s no shortage of regulations and requirements to keep track of, including the crucial SMSF audit. One of the most crucial, yet often dreaded, aspects of operating an SMSF is the annual audit – a process that can be intimidating for many trustees.
But if you know what the audit entails and what to expect, it should be a walk in the park.
So, let’s run through everything you need to know and how you can prepare.
What is an SMSF Audit and Why is it Necessary?
An SMSF audit is a thorough examination of an SMSF’s financial statements and compliance with the Superannuation Industry (Supervision) Act (SIS Act) and its regulations (SISR).
The primary purpose of the audit is to ensure that the SMSF’s financial records are accurate, complete, and comply with regulatory requirements. The audit is conducted by an independent SMSF auditor who is registered with the Australian Securities and Investments Commission (ASIC).
The Role of an ASIC-Registered SMSF Auditor
An SMSF auditor plays a critical role in assessing the financial health and compliance of an SMSF.
They are responsible for:
- Reviewing the financial statements, including the balance sheet, income statement, and member statements.
- Assessing the SMSF’s compliance with the SIS Act and SISR
- Conducting a comprehensive examination of the SMSF’s investment transactions and records
- Identifying any non-compliance issues and reporting them to the trustees and the Australian Taxation Office (ATO).
- Providing an independent audit report to the trustees within a specified timeframe
The SMSF auditor must be independent and have no financial interests or personal relationships with the SMSF trustees or members. This ensures the integrity and objectivity of the audit process.
The SMSF Audit Process
The SMSF audit process involves several stages, from planning to the issuance of the independent auditor’s report. Understanding the key steps can help SMSF trustees and auditors navigate the process effectively.
The typical SMSF audit process includes:
- Planning and Engagement
The SMSF auditor and the trustees engage in the planning phase, where they discuss the scope and objectives of the audit. The auditor outlines the audit requirements, timelines, and documentation necessary for the audit. This phase ensures both parties are aligned on expectations and procedures.
- Gathering and Reviewing Financial Statements
The auditor collects the SMSF’s financial statements, including the balance sheet, income statement, and member statements. These documents are thoroughly reviewed to assess their accuracy and compliance with accounting standards.
- Compliance Audit
The auditor conducts a compliance audit to ensure the SMSF’s adherence to the SIS Act and SISR. This involves assessing the fund’s compliance with regulations related to investments, contributions, benefit payments, and other applicable requirements.
- Independent Auditor’s Report (IAR)
Once the audit is complete, the auditor prepares an independent auditor’s report (IAR). This report provides an opinion on the accuracy of the financial statements and compliance with superannuation legislation. The IAR is then issued to the SMSF trustees within a specified timeframe.
- Auditor Contravention Report (ACR)
If any non-compliance issues or contraventions are identified during the audit, the auditor prepares an Auditor Contravention Report (ACR). The ACR details the nature of the contraventions and is submitted to the ATO within 28 days of completing the audit. It is essential for trustees to address any identified contraventions promptly.
- Frequency and Timing of SMSF Audits
Currently, SMSFs are required to undergo an annual audit. This means that an audit must be conducted for each financial year, regardless of whether contributions have been made or benefits have been paid. The SMSF trustees must appoint an approved auditor at least 45 days before the due date of their annual return to the ATO.
Proposed Three-Year Audit Cycle
In the 2018–19 Federal Budget, the government proposed a change to the SMSF audit frequency. The proposal suggested that SMSFs with a history of good record-keeping and compliance could undergo an audit once every three years instead of annually.
Under the proposed three-year audit cycle, SMSFs eligible for this change would have all transactions for the previous three years audited, as opposed to just the previous year under the annual audit process.
However, the proposed legislation wasn’t passed through parliament, which means you still have to audit your SMSF annually.
Cost of SMSF Audits
The cost of an SMSF audit can vary depending on several factors, including the following:
- Complexity of the fund’s operations
- The number of fund members
- The frequency of investment transactions
- The effectiveness of the fund’s record-keeping systems
While there are no strict guidelines on audit fees, you can generally expect to pay anywhere between $500 and $999.
Ensuring Compliance with the SIS Act and SISR
Compliance with the SIS Act and SISR is paramount for SMSFs to maintain their compliance status and enjoy the associated tax benefits. While the SMSF audit focuses on verifying compliance, trustees must actively monitor and ensure ongoing compliance throughout the year.
Some key compliance areas include:
SMSFs must have a documented investment strategy that aligns with the fund’s objectives and considers the risk profile of its members. Trustees should regularly review and update the investment strategy as needed, ensuring it remains appropriate and in compliance with the SIS Act.
Separation of Assets
SMSFs must ensure a clear separation of assets between the fund and its members. Trustee responsibilities include keeping accurate records, maintaining separate bank accounts, and avoiding situations where fund assets are used for personal purposes.
Acceptance of Contributions
Trustees must comply with regulations related to the acceptance of contributions, including contribution caps, eligibility criteria, and timing requirements. It is crucial to monitor contributions closely and take appropriate action to prevent breaches.
SMSFs must adhere to regulations governing in-house assets, such as restrictions on further acquisitions and compliance with in-house asset ratios. Regular monitoring and reporting of in-house assets are essential to ensuring compliance.
Record-Keeping and Reporting
Accurate record-keeping is vital for SMSFs to meet their reporting obligations and provide evidence of compliance. Trustees should maintain comprehensive records, including meeting minutes, member reports, and financial statements, in accordance with regulatory requirements.
- SMSF audits are essential for ensuring compliance and accuracy of financial statements for self-managed superannuation funds.
- Independent and approved SMSF auditors are appointed by trustees to verify adherence to superannuation legislation.
- Compliance with the SIS Act and SISR is vital for trustees to enjoy tax benefits associated with SMSFs.
- For a successful SMSF audit, trustees must provide required documents, maintain accurate records, and monitor compliance throughout the year.
- Active monitoring allows trustees to rectify non-compliance issues promptly and maintain SMSF compliance and integrity.
Every SMSF is unique, so it is crucial to seek personalised advice from qualified professionals for compliance and informed decision-making.
If you need assistance with navigating an SMSF audit or anything else related to managing your SMSF, contact KNS Accountants and Business Advisors today.
Frequently Asked Questions
Can an SMSF Audit Be Conducted by Any Registered Auditor, or Is There a Specific Requirement?
An SMSF audit must be conducted by an ASIC-registered auditor. There is a specific requirement for the auditor to be registered with ASIC in order to ensure compliance with superannuation regulations.
What Information Should Be Included in the Trustee Representation Letter?
In the trustee representation letter for an SMSF audit, you should include confirmation of compliance with super laws, accurate financial information, and any additional requested documentation within 14 days.
Are There Any Specific Penalties for Late Lodgement of the SMSF Annual Return?
Yes, there are penalties for late lodgement of the SMSF annual return. The ATO specifies appointing an auditor at least 45 days before the due date to avoid financial penalties.
How Does Non-Compliance With SMSF Regulations Affect the Tax Status of the Fund?
Non-compliance with SMSF regulations can result in the loss of your fund’s concessional tax status. The ATO has the power to impose fines, disqualify trustees, and restrict members’ access to their superannuation.